REISA has responded to the Securities and Exchange Commission’s (SEC) request for comments regarding proposed changes to Regulation A (Reg A). REISA, a national trade association for alternative investments, provided comments on state preemption, limitation on types of issuers, a cap of 10% on Tier 2 offerings, and rule 15c2-11 of the Exchange Act.
Deborah Froling of Arent Fox, John Grady from National Fund Advisors and Tom Voekler of Kaplan Voekler Cunningham & Frank make up REISA’s Legislative & Regulatory Drafting Task Force, which is chaired by Darryl Steinhause, a partner with DLA Piper.
For background information on Reg A and the SEC’s proposals, be sure to read Regulation A: Comments are in. Let’s review the Rule and Proposed Changes.
REISA does not believe that state preemption will prohibit states from protecting investors from fraud because they will continue to have full access to all offering documents, since issuers will file publicly. State preemption would eliminate merit review states’ ability to review each issuer and offering.
Merit review states are those that impose their own restrictions on issuers and the offerings, plus, sometimes limit investors’ allocations to specific investments or categories of investments.
These states do this in order to protect their citizens, however, some in the industry question how one state’s residents may need a higher income or net worth than another’s’ in order to invest in certain offerings.
There are only minor differences amongst the merit review states’ restrictions. These could be in the form of income or net worth requirements, limitations on issuer or asset class allocations, amongst others.
“It is very difficult to work through 50 states,” commented Darryl Steinhause, Partner with DLA Piper and Legal Counsel for REISA. “The cost and time is significant.”
“For us to go to multiple states on a $50 million transaction, it’s just not practical,” added Steinhause.
He suggests that if the states could come together and act as one, this would be more suitable.
Currently, and included in the proposal, issuers of oil and gas mineral rights are ineligible from using Reg A. REISA would like to see that changed.
They believe that issuers of fractional interests in oil and gas offerings with an established track record or minimum assets as deemed reasonable by the SEC should be able to benefit from the ease of capital raising under Reg A.
REISA also feels that BDCs should be eligible and, with proper disclosures, have access to the public markets.
The SEC has proposed limiting an individual investors maximum investment in any Tier 2 offering to 10% of that individual’s net worth. REISA agrees with the 10% cap on any issuer level, but not as an aggregate across all Tier 2 offerings. They believe that limiting an individual to only a 10% allocation across all Tier 2 offerings could prevent an investor’s ability to diversify.
According to their comment letter, “REISA believes that the 10% Cap on investment in any individual offering strikes an appropriate balance between investor protection and capital formation.”
Rule 15c2-11 of the Exchange Act
Rule 15c2-11 of the Exchange Act allows issuers’ securities to be quoted in the over-the-counter Bulletin Board (OTCBB) after filing certain disclosures. The SEC proposal suggests that the reporting requirements of Reg A Tier 2 offerings meet these disclosures.
“REISA agrees with the SEC proposal that the reports required of issuers in a Tier 2 offering should qualify as adequate information under Rule 15c2-11,” according to REISA’s comment letter.
“It will give the investors access to a market place that right now only takes place through secondary trading,” said Steinhause. “It’s trying to give people some liquidity.”