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Regulation A-plus Background
Three years ago the JOBS Act was promulgated into law by Congress and approved by President Obama on 5th of April, 2012. While execution of the JOBS Act was significantly delayed by regulators at the SEC, The Title II of the JOBS Act was the starting portion of equity crowd-funding legislation enforced in September of 2013. These sections of the equity crowd-funding laws permitted the issuer for public advertising of campaign for fundraising. But, it restricted the right to invest to Accredited Investors and ignored normal investor out in the cold.
In the very first year of equity crowd-funding permitted under Title II, new capital market growth of over $250 million was observed. This amount was raised preliminary from internet sites.
Regulation A under Section 3(b) of the Securities Act, permits issuer of securities to raise an amount up to $5 million through sales of securities in interstate offerings and there is no need to comply with the Securities Act’s registration requirements. Regulation A as it currently prevailing is considered not so appealing way of capital-raising because of the requirements to comply with securities regulations of state and low volume of annual capitalization.
To make it more appealing there was a significant amendment under Title IV of the JOBS Act amends Section 3(b) of the Securities Act. The amendment attempts for increasing the funding limit to $50 million for a Regulation A-style offering (u/s Section 3(b)(2)) and requires the Securities & Exchange Commission to amend Regulation A or adopt a similar regulations. This provision of the Act is unofficially called by practitioners as Regulation A+.
Knowing about the advantages of Regulation A+ as compared to revised Rule 506 offering or an EGC public offering will become a little more nuanced after factoring in the availability of scaled disclosures, relaxed communications rules and the availability of general solicitation.
An exempt offering which include a Regulation D offering is subject to few limitations that may not be so advantageous and a registered offering may still be costly and a time consuming effort.. Regulation A+ may provide an efficient way of offering which is quite similar to a registered offering. It might be especially advantageous for an issuing party to consider this offering as a precursor to an IPO.
Although there are many likenesses between a prospectus and an offering circular, you can more easily and simply prepare offering circular than prospectus. One other benefit is that the costs of hiring of external advisors, will be lesser for a Regulation A+ offering. Meanwhile timing is perhaps the most vital determinant of successful achievement of an offering, Regulation A+ may suggest a distinctive advantage.
Other significant benefit is that there is no limitation of investors or offerees under Regulation A+ who can subscribe in the offering. Furthermore there is also no requirement for an offeree to be an accredited investors.
Additional benefits of this offering is that an issuer and underwriter can structure a Regulation A+ offering with more flexibility. The securities issued under this regulation will be freely allowed for trading in the secondary market after the offering without any limits of holding period or without any resale restrictions. This may be important to certain institutional investors that are subject to limitations on investments in restricted securities. Issuer can test the capacity the investors and through Regulation A+, and he may also consider conducting a Regulation S or Regulation D offering after conducting of an offering under Regulation A+.
Crowdfunding
Crowd Funding is an emerging outgrowth of social media that provides the fund raisers an emerging way of funding for their ventures. Crowd Funding normally depends on the ability to contribute cash from individuals who have some sort of a common interest and are also willing to contribute slight contributions into the venture. There is no exemption in SEC registration for crowd funding efforts that involve sales of securities. All such activities of fund raiser are illegal. As a result, an individual or an entity selling securities by way of crowd funding could be subject to potential legal obligations at the state and federal level, and potentially in foreign countries.
Pre-JOBS Act registration exemptions are highly time consuming and unworkable for crowd-funding due to the vast use of the internet. But good news is that the Title III of the JOBS Act through its paragraph (6), added under section Section 4 of the Securities Act that makes crowd funding exempt from registration.
Congress mandated the changes to Regulation A as part of the Jumpstart Our Business Startups Act. The SEC’s Regulation A-Plus not only addresses the money threshold, but also includes issuer eligibility rules, content and filing requirements for offering statements, and ongoing reporting requirements for issuers.
Tiers under Reg A+
The Regulation A+ permits two tiers of offerings. Tier 1 typically similar to the current Regulation A, but can allow up to and amount of $20 million in securities for the account of selling holder of security. Whereas, the Tier 2 permits for offerings of an amount up to $50 million over a 1 year time period.
For Tier 2 offerings, the proposed rules include several new requirements designed to protect those who purchase shares in those larger offerings. They include audited financial statements, which will be required of Tier 2 initial filings. In Tier 1 offerings the issuer is not required to submit audited accounts. Tier II fund raisers need to do so.
The rules allow the issuer to rely on information represented by the investor relating to compliance of requirements, unless issuer has reasonable grounds and assumptions to believe that investor’s representations and information’s is not true.
This information was NOT reviewed by an attorney. It is for basic informational purposes only. Be sure to seek professional council prior to attempting to raise money by issuing securities under Reg. A+
Reference List
Securities and Exchange Commission Release No. 33-9497 (December 18, 2013), https://www.sec.gov/rules/proposed/2013/33-9497.pdf
See, e.g., GAO Report to Congressional Committees, “Factors That May Affect Trends in Regulation A Offerings,” (July 2012), https://www.sec.gov/rules/proposed/2013/33-9497.pdf
Letter from William F. Galvin, Secretary of the Commonwealth, Commonwealth of Massachusetts, to the SEC dated December 18, 2013, https://www.sec.gov/comments/s7-11-13/s71113-1.pdf
Letter from Rutheford B. Campbell, Jr., William L. Matthews Professor of Law, to the SEC dated November 13, 2012, http://www.sec.gov/comments/jobs-title-iv/jobstitleiv-18.pdf; Letter from Rutheford B. Campbell, Jr., William L. Matthews Professor of Law, to the SEC dated January 30, 2012, http://www.sec.gov/rules/proposed/s72301/campbel1.htm; The Wreck of Regulation D: The Unintended (and Bad) Outcomes for the SEC’s Crown Jewel Exemptions, Rutheford B. Campbell, Jr., The Business Lawyer, Vol. 66, page 919 (August 2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1971200
The Wreck of Regulation D, supra, at page 941.
See, e.g., Letter from A. Heath Abshure, President, North American Securities Administrators Association, Inc., to the SEC dated April 10, 2013, http://www.sec.gov/comments/jobs-title-iv/jobstitleiv-25.pdf
The only Congressional testimony reflected on the SEC’s website, www.sec.gov, relating to the JOBS Act, was on December 1, 2011, Testimony on “Spurring Job Growth Through Capital Formation While Protecting Investors”, before the Committee on Banking, Housing and Urban Affairs, Meredith B. Cross, Director, Division of Corporation Finance, and Lona Nallengara, Deputy Director, Division of Corporation Finance. However, the testimony, while addressing many of the issues ultimately addressed by the JOBS Act, took no position on these issues. http://www.sec.gov/news/testimony/2011/ts120111mbc.htm
See, e.g., Remarks at FIA Futures and Options Expo, Commissioner Daniel M. Gallagher, November 6, 2013
See Remarks at the Second Annual Institute for Corporate Counsel, Daniel M. Gallagher, December 6, 2013, https://www.sec.gov/servlet/Satellite/News/Speech/Detail/Speech/1370540462287#.UscE-bTl-70
Securities and Exchange Commission Release No. 33-9497, supra, at page 9.
Remarks by President Barack Obama at the JOBS Act Bill, signing, April 5, 2012, http://www.whitehouse.gov/the-press-office/2012/04/05/remarks-president-jobs-act-bill-signing
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