SEC's Reg A+ Takes Effect: Not All States Agree

23rd June 2015

The Securities and Exchange Commission (“SEC”) adopted rule amendments to Regulation A under the Securities Act of 1933 (the “Securities Act”) on March 25, 2015. The final rules and form amendments became effective on June 19, 2015.  

These new capital raising rules, authorized by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), are intended to ease the burden of Securities Act registration for small companies and facilitate access to capital. The rule amendments provide new registration exemptions that increase the amount of capital that an issuer can raise in a 12 month period from $5 million to $50 million, subject to eligibility, disclosure and reporting requirements. (See Moss & Gilmore March 26, 2015 Blog Article, “NEWS FLASH: SEC Adopts Rules to Facilitate “IPO LIGHT” – Smaller Companies’ Access to up to $50 million of Capital”)

The old Regulation A has been around for many years, but was rarely used because issuers could only raise up to $5 million and the transactions also had to comply with the registration requirements in each state that the securities were sold, known as state “blue sky” laws. The burdensome state registration requirements in addition to the low capital raise amount detracted companies from using Regulation A.

The revised Regulation A, commonly known as “Reg A+”, provides for two tiers of qualified offerings over a 12-month period under certain conditions: Tier 1 offerings are up to a $20 million threshold and Tier 2 offerings are up to a $50 million threshold.

Tier 1 offerings must still follow state registration requirements. Rules for Tier 2 offerings, however, let issuers bypass the state registration process. This federal preemption of certain state laws is based on the premise that making issuers register or comply with state “blue sky” laws in multiple states in addition to complying with federal securities laws was discouraging smaller companies from publicly raising capital.

Last month, the States of Montana and Massachusetts filed individual lawsuits against the SEC challenging the Tier 2 offering federal preemption of state securities registration requirements, arguing that these new guidelines limit the states’ abilities to oversee and regulate such transactions. These two cases have since been consolidated into one lawsuit and is ongoing.

While both tiers are subject to certain requirements, Tier 2 offerings will be subject to heftier disclosures and ongoing reporting, such as audited financial statements and annual, semiannual and current event reports, according to the SEC. Additionally, there are also restrictions on who can purchase securities sold in Tier 2 offerings. For example, non-accredited investors will also be limited to buying no more than 10 percent of their net worth or annual income in Tier 2 offerings, according to the SEC's rules.

Under the new Reg A+, both Tier 1 and Tier 2 guidelines will allow issuers to send draft offering circulars to the SEC staff for nonpublic review before filing and continue to use solicitation materials after filing the offering circular.