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Reg A+: Marketing, Testing the Waters and Distribution of Securities

The SEC’s final rules for Regulation A+ build demonstrably upon many of the concepts of marketing and general solicitation already encapsulated in the previous rules for Regulation A, but build upon them to enhance the flexibility and efficiency of the exemption in placing the securities. This does come with certain regulatory requirements that issuers should keep in mind, with the assistance of their counsel, in planning and executing an offering.

Robert R. Kaplan Jr., Partner at KVCF
Robert R. Kaplan Jr.,
Partner at KVCF

The old rules adopted the concept of “Testing the Waters,” or permitting the issuer to engage in a general campaign of solicitation of the public to determine potential interest in a contemplated offering prior to the filing of an offering statement with the SEC. A variety of media could be used with a relatively unfettered range of information that could be provided, BUT no order could be taken on the basis of this solicitation (only non-binding indications of interest), and, once an offering statement was filed, the issuer must cease all use of the materials. The issuer could only use basic “tombstone” information or a preliminary offering circular until the securities were qualified. The new rules, however, greatly expand the use of test the water and other marketing materials that can be used throughout the pendency of your filing to identify interested investors and to solicit investments post qualification. Solicitation materials used after an offering statement is filed must be accompanied by the offering circular or a notice that includes a link to where the most recent preliminary offering circular may be found on EDGAR. Solicitation materials will need to contain certain legends prescribed in the rule. The release of regular factual business communications that do not implicate an offering will not constitute solicitation materials.

Consider how these innovations interplay with some other aspects of the new rules.

A specific exemption from the operation of Rule 12(g) under the Exchange Act of 1934 (the “Exchange Act”) applies for securities issued in Tier 2 offerings. Rule 12(g) generally requires an issuer to register and report under the Exchange Act if the issuer has more than $10,000,000 in assets and more than 2,000 shareholders of record or more than 500 shareholders of record who are not accredited investors. To qualify for the exemption, the issuer must: (i) retain the services of a transfer agent registered under Section 17 of the Exchange Act, (ii) have a public float of less than $75 million or, in the absence of a float, revenues of less than $50 million, in the most recently completed fiscal year, and (iii) be current in its periodic reporting obligations. Of course, broker-dealers can also structure the offering so that securities can be held in “street name” to also avoid the Rule 12(g) problem.

At the same time, the SEC has adopted an “access equals delivery” approach to the requirements for providing the offering circular disclosure to the investor – similar to what you would see in a traditional registered offering. Physical delivery of the circular is not required if a notice is provided as to where the final circular, and all previous filings, can be obtained on the EDGAR site at the SEC at the time subscription is made. The investor then has 48 hours to rescind the order, ostensibly giving time for review and the ability to withdraw if they change their mind.

With these aspects of the new rules in mind, one must ask whether the Reg A+ format presents for broker-dealers a much more efficient model over the traditional Reg D construct in many instances. Rather than long sales cycles with delivery of a voluminous private placement memorandum to hopefully have an investor subscribe in a deal for large sums of money, would the ability to market off of less dense marketing documents for much smaller amounts from a more diverse group of investors be more attractive. Combine this with the promotion of diversification on the basis of these smaller investments, and the ability to use unique offerings to recruit clientele, and perhaps broker-dealers will gravitate to Regulation A as a significant aspect of their business model with greater velocity as more deals hit the street.

This remains to be seen as the market begins to develop.