Title IV of the Jumpstart Our Business Startup (JOBS) Act mandated changes to the moribund Regulation A offering process. That law raised the bar from $5 million to $50 million and prodded the SEC into making changes. The SEC issued the proposed rule with enough interesting treats that it may be worth exploring. The SEC is treating it like an IPO-lite as opposed to the wary eye cast on private placements.
The proposal splits Regulation A offerings into two baskets. Tier 1 offerings can be for up to $5 million a year. Tier 2 offerings can be for up to $50 million per year. By stepping up to Tier 2, the company’s financial statements must be audited and company must file semiannual reports and updates similar to public company reporting.
The part the SEC got right is that Tier 2 offerings would be exempt from state registration. The existing Regulation A’s failure to preempt the state blue sky laws is a major reason it is not used. I don’t see why the SEC would even bother with an offering type that does not preempt state blue sky laws. Tier 1 offerings under Regulation will likely continue unused.
The real nasty part is that investors are limited to purchasing no more than 10% of an investor’s net worth or annual income. That’s a big red flag. However, the SEC took the smart approach and did not turn that into a compliance requirement. The company needs to make investors aware of the 10% restriction, but can rely on a representation from the purchaser. The investor does not have to disclose personal information to verify compliance.
The proposal makes Regulation A a quirky middle ground to private placements and public offerings.
- SEC rule proposal
- SEC Proposes Rules to Increase Access to Capital for Smaller Companies
- SEC Proposes Long-Awaited Regulation A+ Rules by Dave Lynn in The Corporate Counsel .net
- SEC Issues Proposed Regulation A+ by Jason W. Parsont in the CLS Blue Sky Blog
- Does the SEC’ Regulation A Proposal Defy Congress’ Clear Intent? by Keith Paul Bishop in California Corporate & Securities Law