When is an IPO an IPO without the regulatory burdens and obscene costs typically associated with IPO’s? When it’s a Regulation A offering. Regulation A is a class of exemption that has been on the books for about 80 years, but has not been used much in the last 40 years due to significant limits on the amount one could raise and a lack of an exemption from state registration requirements.
The U.S. Securities and Exchange commission recently announced the final set of rules to amend Regulation A as required under Title IV of the Jumpstart Our Business Startups (JOBS) Act. These new rules, classified as Regulation A+, provide an updated exemption from registration for smaller issuers of securities, allowing them to raise up to $50 million in a 12-month period, up from a previous limit of $5 million. Under the new rules, smaller companies can more easily access investor capital, ultimately providing investors with more investment choices.
Under the Securities Act of 1933, a company must register an offering of securities made to the public. Most issuers have relied in recent history on exemptions from registration based on the fact that the offering was not public in nature, and for the broadest flexibility under Regulation D, only made to accredited investors. Regulation A is different in that the exemption is not based on how one offers the securities, but rather is a procedure to exempt the securities themselves from registration. So, if qualified under Regulation A, they can be offered publicly through most media, they are freely tradeable and are not limited to certain types of investors.
The adjusted rules of Regulation A+ create two new tiers of investor offerings:
- Tier 1 for security offerings of up to $20 million in a 12-month period with no more than $6 million in offers by selling security-holders that are affiliates of the issuer, which will operate as before under, for the most part, the old rules; and
- Tier 2 for offerings of securities of up to $50 million in a 12-month period, with no more than $15 million in offers by selling security-holders that are affiliates of the issuer, which will have new disclosure and reporting requirements, but will be exempt from state registration requirements and will have the ability to avoid a number of regulatory hurdles that frustrate many issuers. Non-accredited investors are limited to investing no more 10% of their income or net worth (whichever is greater) in an initial offering, but issuers can rely on representations from investors to comply.
The new offering exemption is not available to companies that are already SEC reporting companies (i.e: “public” companies) and certain investment companies. If the issuer has “gone private” then that could not have been the result of an order of the SEC under Section 12(j) of the Exchange Act in the past five years. Companies who have no specific business plan or purpose, or that are seeking to offer and sell asset-back securities or fractional undivided interests in oil, gas or other mineral rights are also ineligible. A company is likewise ineligible if they have been disqualified under the “bad actor” disqualification rules. Companies that have previously conducted Tier 2 offerings must also be current in reporting.
Additionally, the rules exempt securities in a Tier 2 offering from the mandatory registration requirements of Exchange Act under Section 12(g) if the company reaches a triggering asset and shareholder size, provided that it engages services from a transfer agent registered with the Commission and remains current in its Tier 2 reporting obligations. The company must also have a public float of less than $75 million as of the last business day of its most recently completed semi-annual period. In the absence of a public float, the company must have annual revenues of less than $50 million in its most recently completed fiscal year. An issuer that exceeds the dollar thresholds fails to maintain these carve-out requirements will still be given a two-year transition period before it must register under the Exchange Act as long it files all ongoing reports required under the original parameters of Regulation A.
“These new rules provide an effective, workable path to raising capital that also provides strong investor protection,” SEC Chair Mary Jo White said in a statement accompanying the SEC Fact Sheet. “It is important for the commission to continue to look for ways that our rules can facilitate capital raising by smaller companies.” In ensuing articles, I’ll explore the specifics of the new Regulation A rules and the potential for issuers, financial professionals and investors alike.