SEC Expands ‘Regulation A’ Eligibility to Reporting Companies

Regulation A provides an exemption from the registration requirements of the Securities Act of 1933 (the “Securities Act”) for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings, in each case in any rolling 12-month period.

Under the current rules, Regulation A is not available to companies (“’34 Act Companies”) subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934 (“Exchange Act”). However, on December 19, 2018, the Securities and Exchange Commission (“SEC”) announced that it adopted amendments to 17 CFR 230.257 (“Rule 257”) to make ’34 Act Companies eligible to utilize Regulation A. In addition, with respect to Tier 2 offerings, the amended rule provides that such issuers would be deemed to have met the periodic and current reporting requirements under Regulation A if they have otherwise complied with the reporting requirements of the Exchange Act.

Key Takeaways

’34 Act Companies now have an additional way to access the public markets via an alternative offering process that may enable some issuers to optimize their financing strategy and reduce offering costs as a result of greater flexibility in raising capital. In particular, an offering under Regulation A allows for greater marketing efforts than are permissible under a traditional registered offering.

Issuers likely to take advantage of the amendments to pursue a Regulation A offering may be issuers that would have otherwise pursued a registered offering but have decided not to list on an exchange. Certain benefits available to '34 Act Companies newly eligible under Regulation A include:

• Tier 2 issuers are eligible for blue sky preemption; 
• Tier 2 issuers may solicit interest from any potential investors whether they are qualified institutional buyers (QIBs), accredited investors, or non-accredited investors (i.e., “testing the waters” communications); ¹
• Safe harbor from the integration of offerings; 
• Efficiency, legal cost savings, and reduced compliance requirements from using Regulation A as compared to registered offerings; and
• A potentially easier and more cost-effective route to utilizing the internet to offer securities, including securities token offerings. 

In addition, as noted above, issuers that are current in their Exchange Act reporting requirements under Section 13 or 15(d) will not subjected to any additional reporting requirements under a Regulation A offering because an issuer that is current in its reporting requirements under the Exchange Act will simultaneously fulfill its Regulation A reporting requirements.  

The amendments to Regulation A will become effective upon publication in the Federal Register.  As of the date of this Client Alert, January 15, 2019, the amendments had not yet been published in the Federal Register.

More detailed information on the benefits of Regulation A eligibility is provided below.

1. Blue Sky Preemption 

• Reporting companies offering securities not listed on a national exchange that use Tier 2 are eligible for blue sky preemption – which can expedite the offering process – and allow offerings involving a wider range of offering terms, particularly in states with merit review. 
• Blue Sky preemption also enables issuers to offer securities in multiple states to a broader range of investors. Non-accredited investors in Tier 2 offerings of non-exchange-listed securities may invest no more than 10% of the greater of their income or net worth in a given offering. 

2. Testing the Waters Communications 

• Regulation A, particularly Tier 2, may also provide additional flexibility with respect to solicitation of investor interest (i.e., “test-the-waters” communications), as compared to registered offerings, particularly for reporting companies that either do not qualify as emerging growth companies (EGCs) or that seek to solicit indications of interest from individual or small investors 
• Subject to certain conditions, Regulation A issuers may solicit indications of interest from any investor before qualification of an offering statement, which may allow issuers to gauge investor interest prior to deciding whether to incur the full cost of the offering. Even after qualification, an issuer may continue to market the qualified securities more broadly than in a registered offering if it provides the offering circular prior to or simultaneously with the marketing, which is very useful for those issuers using the internet to market the offering.

3. No Integration of Offerings

• Rule 251(c) of Regulation A provides issuers with a safe harbor that offerings conducted pursuant to Regulation A will not be integrated with prior offers and sales of securities or with certain subsequent offers and sales of securities.
• The flexibility to alternate between Regulation A and registered offerings may be particularly valuable for non-exchange-listed issuers, past Regulation A issuers that have become reporting companies but wish to do follow-on Regulation A financing, and more generally, for other issuers that are uncertain about whether their future financing strategy will rely on Regulation A or registered offerings. 

4. Efficiency and Cost Savings

• The cost of preparing an offering statement on Form 1-A may be lower than the cost of preparing a registration statement, particularly for issuers ineligible for streamlined securities registration on Form S-3 or F-3. 
• Tier 2 securities of smaller issuers ² may be conditionally exempt from the number of shareholders of record for purposes of Section 12(g), so using Regulation A for new financing may enable issuers to maintain a lower number of shareholders of record, which may make it easier for issuers to deregister under Section 12(g) in the future and suspend Exchange Act reporting. 
• Regulation A offerings are not subject to liability under Section 11 of the Exchange Act, which may lower the legal risks and costs associated with the offering.

5. Securities Token Offerings

• Companies and individuals are increasingly considering securities token offerings (STOs) as a way to raise capital or participate in investment opportunities. 
• In addition, with the crackdown by the SEC on unregistered token sales (where the issuer took the position it was only selling a “utility token” that was not a security), issuers seeking to offer tokens to other than accredited investors may find Regulation A’s flexibility to sell security tokens to both accredited and non-accredited investors the most efficient way to reach a larger audience of potential investors. While most ’34 Act Companies have not yet embraced the concept of digital securities, the use of securities tokens is growing.  A few “alternative trading systems” (ATS) have already been registered with the SEC to trade securities tokens.  As these platforms proliferate, the potential liquidity offered by ATSs (and stock exchanges that have already begun exploring whether to permit digital securities to trade) will increase and the use of Regulation A as a means to offering securities tokens will likely  increase as well. While we are working with several clients on securities token offerings under Regulation A, and have seen a number of filings with the SEC,  we are not aware as of this date of any securities token offerings that have been qualified by the SEC. We think that will change in the future.

Next Steps for Reporting Companies

’34 Act Companies interested in broadening the tools they have to access capital may wish to consider a Regulation A offering, since such offerings  potentially can be faster, less expensive, and offer better pricing.

The following appendix is a table comparing Regulation A’s main features and requirements to those for a registered offering under the Securities Act and a private placement under Regulation D.

Comparison of Various Registration/Exemption Requirements 3
	Tier 1 of New Regulation A+	Tier 2 of New Regulation A+	Registered Offering on Form S-1/11 4	Private Placement Regulation D – Rule 506
Offering Limit	Up to $20 million primary ($6M affiliate selling securityholders) in a rolling 12-month period 30% limit on secondary offerings	Up to $50 million ($15M affiliate selling securityholders) in a rolling 12-month period 30% limit on secondary offerings	No Limit	No Limit
Offering Documents	Form 1-A Qualification Statement Offering Circular		Form S-1/11 Registration Statement Prospectus	None required if offering only to accredited investors
SEC Filing Requirements	Must file Form 1-A with the SEC, which must be reviewed and qualified by the SEC		Must file Registration Statement with the SEC, which must be reviewed and declared effective by the SEC	Offering Documents:  None required if offering is only to accredited investors Form D: 506(b): 15 days post-closing 506(c): 15 days pre-offering and 30 days after termination (proposed rules) Other filings: 506(c): written general solicitation materials (proposed rules)
Non-Public Review/Confidential Submissions	Available for all issuers whose securities have not been previously sold pursuant to Reg A or the Securities Act. Must be filed publicly and available on EDGAR as at least 21 days before Reg A offering statement is qualified		Emerging Growth Companies permitted to submit confidentially. Must file publicly at least 21 days prior to roadshow commencement	Not Applicable
	Tier 1 of New Regulation A+	Tier 2 of New Regulation A+	Registered Offering on Form S-1/11 4	Private Placement Regulation D – Rule 506
Blue Sky Requirements	Blue sky law compliance is required, with the newly implemented NASAA coordinated review process available	Exempt from state law review, subject to state filing and anti-fraud authority, for offerings to “Qualified Purchasers” 5 or where securities are listed on a national securities exchange	Blue sky law compliance is required unless securities listed on a national securities exchange	506(b):  Exempt from state law review, subject to state filing (generally post-closing) and anti-fraud authority 506(c):  In addition to the above, NY Form 99 pre-offering
Investor Qualifications	Accredited and Non-Accredited			506(b):  Accredited plus 35 non-accredited 506(c):  Accredited only
Investment Limitations on Investors	No Limits	Investment limit applicable for persons who are not accredited investors	No Limits	No Limits
Restrictions on Resale of Securities	No restrictions on the resale of securities, except to the extent that the securities are held by affiliates			Exemption generally required
General Solicitation to Public	Allowed 6			506(b):  Not Allowed 506(c):  Allowed
	Tier 1 of New Regulation A+	Tier 2 of New Regulation A+	Registered Offering on Form S-1/11 4	Private Placement Regulation D – Rule 506
Offering Communications	An issuer may “test the waters” using oral, and subject to pre-filing, written communications with any potential investor to determine if there is interest in a proposed offering prior to filing the Form 1-A. Sales literature may be used before the filing of the Form 1-A, after filing such literature, and following qualification 7		An issuer may “test the waters” only with QIBs and institutional accredited investors using written and oral communications to determine if there is interest in a proposed offering prior to and after the filing the Registration Statement	Not Applicable
Financial Statement Requirements	Audited financial statements only if prepared for other purposes.  If audited, then must be audited by an independent accountant, but not required to be PCAOB-registered Current balance sheet, income statement for two years, as well as any interim period	Audited financial statements required, reviewed by an independent accountant and prepared in accordance with PCAOB standards Current balance sheet, income statement for two years, as well as any interim period	Audited financial statements required, reviewed by an independent accountant and prepared in accordance with PCAOB standards Balance sheets and income statements for two years, respectively, plus interim periods Selected income statement and balance sheet data for each of the last two years and any interim periods	None required if offering only to accredited investors
Disqualification Provisions	Felons and bad actors disqualified; Rule 262 updated	Felons and bad actors disqualified; Rule 262 updated	Bad actor disqualification does not apply	Felons and bad actors disqualified
Ongoing Reporting	A termination report required	Subject to ongoing reporting obligations, including a requirement to file: current reports, semi-annual reports; and annual reports, until obligations are terminated or suspended 8	Subject to ongoing reporting obligations, including a requirement to file: current reports, quarterly reports and annual reports	Not Applicable
Sarbanes-Oxley Act Certifications	Sarbanes-Oxley Act certifications not required		Sarbanes-Oxley Act Section 302 and 906 certifications required to be signed by CEO and CFO and filed with each Form 10-Q and Form 10-K	Not Applicable
	Tier 1 of New Regulation A+	Tier 2 of New Regulation A+	Registered Offering on Form S-1/11 4	Private Placement Regulation D – Rule 506
Board of Director Committee and Independence Requirements	No board of director committee and independence requirements		Subject to blue sky director independence requirements and, if listed on an exchange, the exchange’s board of director committee and independence requirements	No board of director committee and independence requirements
Integration	Reg A offering will not be integrated with: Prior offers or sales of securities Subsequent offers or sales of securities that are: Registered under the Securities Act Made in reliance on Rule 701 Made pursuant to employee benefit plan Made in reliance on Regulation S Made pursuant to Section 4(a)(6) of the Securities Act (crowdfunding) Made more than 6 months after the completion of the Reg A offering; or Concurrent Reg A and 506 offerings as long as each offering respects its own exemption/qualification requirements		Offerings will not be integrated with prior or subsequent public offers or sales of securities	Integration Applies
Potential Liquidity	Minimal – probably will require state registration on resales	Unknown – Non-registered exchanges could provide liquidity If FINRA brokers are quoting prices need to comply with Rule 15c2-11	Excellent – if listed on securities exchange Minimal – if unlisted	Minimal – exemption generally required

 

¹ Tier 1 offerings do not preempt state law and accordingly, any issuer attempting to test the waters for a Tier 1 offering must comply with the individual state law(s) for the state in which they intend to qualify the offering.

² A smaller issuer who is not required to register with the SEC is defined as an issuer with total assets less than $10 million or a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited investors and meets other exemption requirements (enlists a transfer agent and meets other size-based requirements) of Regulation A.

³ This chart highlights material information regarding various registration/exemption requirements. To understand the registration/exemption requirements fully, however, please read the SEC rules and guidance, and/or contact an attorney to assist.

⁴ This chart assumes the issuer is an “emerging growth company.”

⁵ Qualified Purchasers include: (i) accredited investors and (ii) all other all investors so long as, for non-accredited investors, the investment does not represent more than 10% of the greater of annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). These limitations do not apply if the issuer lists its securities on a national securities exchange.

⁶ For Regulation A, after qualification, an issuer may continue to market the qualified securities more broadly than in a registered offering if it provides the offering circular prior to or simultaneously with the marketing; registered offerings are limited to Rule 134 communications.

⁷ Tier 1 offerings do not preempt state law and accordingly, any issuer wishing to test the waters for a Tier 1 offering must comply with the individual state law(s) for the state in which they intend to qualify the offering.

⁸ Tier 2 issuers’ reporting obligations under Regulation A+ may be suspended under Regulation A+ at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement was qualified, so long as the securities of each class to which the offering statement relates are held of record by fewer than 300 persons, and offers or sales made in reliance on a qualified Tier 2 Regulation A+ offering statement are not ongoing. If a Tier 2 issuer exceeds the 300 person threshold, it is still exempt from the registration requirements of Section 12(g) of the Exchange Act as long as the issuer hires a registered transfer agent, remains subject to and current in its Tier 2 periodic reporting obligations, and had a public float of less than $75 million as of its most recently completed semiannual period (or for an issuer without a public float, annual revenues of less than $50 million as of its most recently completed fiscal year). Without this exemption, Section 12(g) would otherwise require the Tier 2 issuer to comply with public company reporting obligations once a class of equity securities is held of record by (i) more than 2,000 holders or (ii) more than 500 holders who are not accredited investors or who did not receive the securities under a compensation plan. An issuer that exceeds both the exemption’s public float or revenue threshold and Section 12(g)’s 2,000/500 holders threshold would be granted a two-year transition period before being required to register its securities under Section 12(g).