Small businesses and startups should take note of new registration exemptions that enable companies to offer and sell up to $50 million of securities in a 12-month period. Known as Regulation A+, the new rules implement one of the final mandates of the 2012 Jumpstart Our Business Startups Act (the JOBS Act) and make raising capital more accessible to smaller private companies. It will also provide investors with more investment choices.
When it became effective last June, Regulation A+ updated and expanded existing Regulation A, an exemption from registration requirements of the Securities Act of 1933 for smaller issuers of securities. Regulation A has been around for years but it was seldom-used, in part because it came with burdensome disclosure requirements and capped unregistered public offerings at $5 million annually.
The updated version raises that ceiling and provides for two different tiers of offerings:
- Tier 1 consists of offerings of securities of up to $20 million in a 12-month period, with not more than 30% of the offering by selling security-holders that are affiliates of the issuer.
- Tier 2 consists of offerings of up to $50 million in a 12-month period, with no more than 30% of the offering from affiliates of the issuer.
In addition to the limits on secondary sales by affiliates, the rules also limit sales by all selling security-holders to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.
The Two Tiers
Both tiers are subject to certain basic eligibility, disclosure, and procedural requirements, drawn from the provisions of Regulation A. Issuers must submit an offering statement on Form 1-A, which is reviewed by the SEC, and include financial statements for the preceeding two fiscal years. They must also file post-offering reports with the SEC. The documents must be filed electronically, via the SEC’s online filing system.
But companies conducting Tier 2 offerings would be subject to additional requirements, including the provision of audited financial statements. Following completion of the offering, Tier 2 issuers must file annual, semiannual and current event reports as part of ongoing reporting obligations. The final rules also impose an investment limitation on non-accredited investors in Tier 2 offerings. For individuals, the limit is 10 percent of their annual income or net worth, whichever is greater. For entities, the limit is 10 percent of the greater of its annual revenue or net assets. Non-accredited investors may purchase without limitation in Tier 1 offerings.
Despite the more rigorous oversight, Tier 2 offerings offer the significant benefit of being exempt from state substantive securities law requirements, or Blue Sky Laws. Tier 2 offerings also provide an exemption from the provisions of Section 12(g) of the Exchange Act, which requires a private company to register its securities with the SEC if its total assets exceed $10 million and if it has either 2,000 holders of record of its equity securities, or 500 persons who are not accredited investors. This exemption is only available to companies that have a public float of less than $75 million as of their most recently completed semiannual period or annual revenues of less than $50 million.
Test The Waters
Regulation A+ also gives issuers the ability to test the waters with potential investors and use solicitation materials both before and after the offering statement is filed. Any solicitation materials used after public filing of the offering statement must be accompanied by a preliminary offering circular. In addition, the rule allows companies to submit draft offering statements for non‑public review by the SEC staff before filing final documents, as long as the final documents are publicly filed at least 21 days before qualification of the offering statement.
There are certain eligibility requirements for companies looking to take advantage of Regulation A+. The exemption is limited to nonpublic companies with their principal place of business in the U.S. or Canada.
It is also not available to companies that, among other things:
- Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
- Are looking to offer and sell asset-backed securities.
- Are disqualified under the “bad actor” disqualification rules.
- Are already SEC reporting companies and certain investment companies.
What Does This Mean?
Regulation A+ provides nonpublic companies with an important way to raise capital outside of a traditional Regulation D private offering or an initial public offering, which is generally more costly. It also enables startups to approach small investors to help fund their business.
It is worth noting that parts of the regulations, in particular Tier 2’s exemption from state substantive “Blue Sky” requirements, have been challenged in the Court of Appeals for the D.C. Circuit by Attorneys General in Massachusetts and Montana. This challenge was rejected by the District of Columbia Court of Appeals.