Breaking news and expert analysis on legal and compliance issues
From Securities Regulation Daily, December 18, 2013
By Jacquelyn Lumb
The SEC commissioners today unanimously voted to issue a proposal that would implement a JOBS Act mandate by updating Regulation A. Currently, Regulation A permits unregistered offerings of up to $5 million of securities in a 12-month period with no more than $1.5 million of the securities offered by selling security holders. Regulation A is rarely used, which is largely attributed to the complexity and costs of complying with both state and federal securities laws. Congress directed the SEC to adopt rules to allow offerings of up to $50 million of securities within a 12-month period with certain conditions.
Two tiers. The SEC’s proposal contemplates the adoption of two tiers of Regulation A offerings. The first tier would mirror the current Regulation A. The second tier would consist of offerings of up to $50 million in a 12-month period, including $15 million for the account of selling security holders. The basic requirements for both tiers, such as issuer eligibility and disclosure, are drawn from the existing provisions of Regulation A.
The proposal would update Regulation A to permit companies to submit draft offering statements to the SEC for a nonpublic review before filing either Tier 1 or Tier 2 offerings. It would permit issuers to test the waters with solicitation materials before and after the filing of the offering statement, and would update the qualification, communication and offering process so that it is similar to the 1933 Act registration process.
Under Tier 2 offerings, investors would be limited to purchasing no more than 10 percent of the greater of their annual income or net worth. The issuer’s financial statements that appear in the offering circular must be audited. The issuer would be required to file annual and semiannual reports and current updates.
The revised Regulation A offerings would be available to companies organized in and with their principal place of business in the U.S. or Canada, as with current Regulation A offerings. The exemption would not be available for companies that are already SEC reporting companies or certain investment companies.
Eligibility. The exemption also would not be available to companies that have no specific business plan or that plan to engage in a merger or acquisition with an unidentified company; those that plan to offer and sell securities or fractional interests in oil, gas, or other mineral rights; those that have not filed ongoing reports as required during the past two years, those subject to an SEC order revoking their 1934 Act registration during the preceding five years; or those that have been disqualified under the proposed bad actor rules.
State law requirements would be preempted for Tier 2 offerings, but the proposal seeks comments on other approaches, including a coordinated review program that been proposed by the North American Securities Administrators Association (NASAA).
Chair White. In opening remarks, Chair Mary Jo White noted that the proposal recognizes the criticisms about existing Regulation A with respect to the complexity, time, and costs of compliance with state securities laws, and the proposal provides a viable path to capital-raising through a calibrated preemption of state securities laws. She also highlighted NASAA’s proposal which could reduce the costs of compliance with state securities laws and speed up state level reviews. NASAA outlined the review program in a letter to the SEC last week.
Aguilar. Commissioner Luis Aguilar said he looked forward to NASAA and the state regulators’ completion of their work on the state review program for Regulation A offerings. The states have extensive expertise in reviewing small offerings, he said.
Aguilar also addressed the need for the SEC to be proactive in addressing foreseeable consequences of Regulation A+, as it is known. For example, he expects the staff to actively monitor secondary trading activity after Regulation A+ is adopted for signs of fraud, manipulation, or market failure.
Aguilar said the SEC also needs to take a hard look at 1934 Act Rule 15c2-11 which outlines the information required under Rule 144 for non-reporting companies. He hopes the staff will complete a review of the rule and recommend any necessary changes before the adoption of the crowdfunding and Regulation A+ rules.
Gallagher. Commissioner Daniel Gallagher said the proposal serves as a reminder that the SEC should continually review its rules and exemptions to make sure they are meeting their objectives, and it should do so before it is subject to a congressional mandate. The SEC was aware of views that the $5 million aggregate offering limit of Regulation A was too low and compliance with the blue sky laws was too cumbersome. Gallagher was disappointed that Congress did not choose to preempt the blue sky laws altogether in the JOBS Act mandate.
Stein. Commissioner Kara Stein expressed reservations about whether the proposal would work for issuers seeking to raise small amounts of capital and whether it would unnecessarily preclude states from performing their important oversight roles. In her view, the proposal should have included an attempt to make the old Regulation A work. She also questioned how the proposal will fit within the framework of the federal regulatory regime, with the crowdfunding rules that provide greater investor protections than Tier 1 does under the Regulation A+ proposal.
Piwowar. Commissioner Michael Piwowar said he was pleased by the discussion in the release that compares Regulation A, Regulation D and registered offerings. Given the lack of Regulation A offerings, he hopes that commenters will address whether there should be an intermediate tier in the range of $10 to $15 million that would preempt state blue sky laws but have less extensive continuing disclosure obligations than the proposed Tier 2 offerings.
Piwowar also asked to have included in the release a question about whether a new regulatory model is appropriate under which a single approval process is available. Issuers could seek qualification from either the SEC or a state securities regulator for a Regulation A offering, he explained.
The comment period on the proposal will remain open for 60 days.
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