The upside potential of any Regulation A+ deal far outweighs the downside and costs
Title IV of the JOBS Act, often referred to as Regulation A+, was announced December 18, 2013 . The latest rules added to and modified the current Regulation A offering ( (Section 3(b)(1)). The topic and rules proposed in Regulation A+ have been debated hotly. Most of the discussion has revolved around state law preemption. the business community at large was in unanimous and unilateral support of the new proposed changes, including the state preemption.
Regulators attempted to assuage the fear of opposition by compromising on state law preemption only with Tier 2 offerings, allowing for Tier 1 offerings to still include state’s rights on regulating securities registration. Here are some of the Regulation A+ Rules & Regulations:
The complete Reg A+ rules allow for two differing offering types, referred to as “tiers.” Tier 1 allows for capital raising of up to $20,000,000 in a 12-month period. $6,000,000 of the entire raise can be used for resale by selling affiliate shareholders. Tier 2 allows for the offering of up to $50,000,000 in any 12-month period with no more than $15,000,000 to be used as resale by existing shareholders. While Tier 2 offerings require additional disclosures, including audited financials submitted to the SEC, Tier 2 also preempts state laws, exempting Tier 2 issuers from the requirement of registering securities in individual states. For issues of up to $20,000,000 issuers can make the choice between proceeding under either Tier 1 or Tier 2.
Non-affiliates who issue shares in a Regulation A+ offering will have their shares as immediately freely tradable. Affiliates, on the other hand, will be subject to the typical Rule 144 restrictions had in Form S-1. In addition, selling shareholders will be limited to selling no more than 30% of their shares in the overall offering.
Perhaps one of the most important components of Tier 2 offerings is the preemption of the state blue sky laws for securities offered and sold to “qualified purchasers.” Tier 1 will require full blue sky compliance state-by-state. This is likely a non-starter for Tier 1, unless of course issuers wish to proceed through the muddy waters of registration across multiple states. NASAA has released a comprehensive and coordinated review program for compliance in Tier 1 offerings where securities will need to be individually registered at the state level. This should prove helpful to issuers looking to do a Tier 1 offering. We expect, however, that most Regulation A+ issuers will be looking to streamline the process by opting for Tier 2 and exempting themselves from the onerous process of individually registering state-by-state. However, we do assist with the state review in accordance with NASAA rules for those whose intent is to perform a Tier 1 Reg A+ offering.
The opportunity available to issuers in Regulation A+ is substantial, but that doesn’t preclude potential issuers from complying with disclosure and eligibility requirements. Regulation A+ rules and submission requirements fall in-line with the existing, current processes in place for registering securities with the SEC’s EDGAR database. Regardless of which Tier is being used, the issuer will be required to submit offering statements for non-public review by the SEC staff before the filing becomes public and effective via the EDGAR system.
The final rule amendments made changes to Section 12(g) of the Securities Exchange Act of 1934. Issuers can now rely on conditional exemption from mandatory state share registration. In addition, the new rules amend Rule 15c2-11, allowing broker-dealers to adhere to information requirements under Tier 2 with support from the quotation system used on the OTC Markets.
If you’re thinking about utilizing Reg A+ to raise money, please be sure to reach out to us. We can help assist you through this complex and cumbersome process.