The Securities and Exchange Commission (SEC) has amended Regulation A to permit its use by companies that are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act).1 Regulation A provides an exemption from the registration requirements of the Securities Act of 1933 for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings. The SEC was required to take this action by the Economic Growth, Regulatory Relief, and Consumer Protection Act.2 The amendment will become effective upon publication in the Federal Register.
Previous amendments to Regulation A, undertaken in 2015 with a view to making it to easier for small businesses to raise money by easing their regulatory burdens, increased the size of a qualifying offering from $5 million to $50 million annually, provided detailed requirements for offering statements, and detailed ongoing reporting requirements for issuers completing a Regulation A offering. However, until this recent amendment, Regulation A was not available to Exchange Act reporting companies.
The Impact of the Amendment
The current amendment extends the benefits of Regulation A to Exchange Act reporting companies. An Exchange Act reporting company will be deemed to satisfy the special ongoing reporting requirements of Regulation A (such as the obligation of an issuer completing a Tier 2 offering to file an annual report on Form 1-K) if it is current in its Exchange Act reports on the date a Regulation A report is due. However, if an Exchange Act reporting company is not current in its Exchange Act reports at the time a report is required by Regulation A, it will be required to file the Regulation A report.
The use of Regulation A can provide certain advantages to Exchange Act reporting companies. Regulation A permits solicitation of investor interest, or so called "test the waters" communications, prior to filing an offering statement. That flexibility was already available to emerging growth companies in registered offerings, but only for communications with qualified institutional buyers and institutional accredited investors.
An Exchange Act reporting company that does not have securities listed on a national securities exchange can benefit from the preemption of state blue sky laws associated with a Tier 2 offering, a benefit not available to it in a registered primary offering.
Guidance on Application of Regulation A to Exchange Act Reporting Companies
In its adopting release, the SEC provided guidance on how some of the requirements of Regulation A would be applied to Exchange Act reporting companies:
- While the financial statement requirements of Regulation A were not amended, if an issuer has made publicly available more recent financial statements than those required by Regulation A when it files a Form 1-A offering statement (or when the offering statement is qualified), it may be necessary to include those more recent financial statements in the offering statement to avoid the offering statement from being misleading. Notably, an issuer's Exchange Act reports cannot not be incorporated by reference into the Regulation A offering statement.
- Part F/S of Regulation A permits companies using a Tier 1 offering to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities. The adopting release made it clear that this benefit is not available to Exchange Act reporting companies.
- The release also made it clear that the securities issued in a Tier 2 offering by an Exchange Act reporting company will be excluded from the "held of record" count for purposes of Section 12(g) of the Exchange Act in the same manner they are excluded for private companies.
- Finally, the release indicated that Canadian companies that file reports under the Exchange Act will also be eligible to use Regulation A.
- Securities Act Release No. 33-10591 (December 19, 2018), available at https://www.sec.gov/rules/final/2018/33-10591.pdf.
- Pub.L.115-174, 132 Stat. 1296 (2018).