SEC Considering New Regulation A Provisions

Just before the holidays, the SEC proposed an update to the little-used Regulation A exemption that if adopted would be added to the existing Reg. A. The current Reg. A rule exempts small public offerings of securities that do not exceed $5 million in any 12 month period; however, the issuer must file an offering statement with the SEC (in addition to state law compliance), and must also provide purchasers with an offering document similar in intent and scope to a prospectus in a registered offering (the SEC provides three formats that companies can use that comply with Reg. A). However, the company’s financial statement do not need to be audited like a company with registered securities, and the company is also not subject to reporting requirements until it has more than $10 million in assets and 500 shareholders. The SEC decided to propose an additional Reg. A rule after only 8 Reg. A offerings were made in 2012, as compared to 7,700 offerings in the same year under the various Reg. D rules. The provisions of the new Reg. A rule include: – A $50 million cap in any 12 month period (including up to $15 million in securities sold by stockholders) – Preemption of blue sky laws – SEC reporting requirements and requirement of audited financial statements – Offering statement that must be filed with the SEC (although issuers may do so confidentially for staff review) – Investor are limited to purchases equalling no more than 10% of their annual net income or net worth (whichever is greater) – Issuers must be organized under U.S./state or Canadian/provincial laws – No investment companies, companies who are delinquent in other filing requirements, companies who lack a business plan, or companies that are classified as “bad actors” Some SEC commissioners have also proposed an intermediate tier with a $15 million cap that also preempts state laws but has less onerous ongoing reporting requirements. Other commissioners have criticized the new rule as something that issuers still wouldn’t be interested in utilizing when compared to Reg. D rules, while also criticizing the proposal for preempting state laws and having fewer investor protections than even the proposed equity crowdfunding rules. I concur with critics of the proposed rule. Reg. D offerings, particularly Rule 506 and even the new general solicitation rule under 506(c), are more attractive to issuers for their less onerous compliance requirements. By the time the costs of this new Reg. A offering become less than the benefits, an issuer is probably well on their way to an IPO, particularly with the new on-ramp rules. In my estimation, Reg. A is simply redundant in the face of Reg. D and its much easier rules. The proposal is currently in a 60-day comment period. Read the proposed rule here: http://www.sec.gov/rules/proposed/2013/33-9497.pdf

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