The Securities and Exchange Commission today proposed rules to implement a new exemption from registration for securities offerings made pursuant to Section 3(b)(2) of the Securities Act of 1933 (Securities Act), as mandated by Section 401 of the Jumpstart Our Business Startups Act (JOBS Act). This new offering exemption is commonly referred to as “Regulation A-Plus.”
The discussion below is based on statements made by the Chair, Commissioners and Staff at today’s Open Commission Meeting. We expect that the comment period – which will run for 60 days from the date the proposing release is published in the Federal Register – will expire in approximately late-February 2014.
The proposed rules would amend existing Regulation A under the Securities Act by creating a second “tier” of offerings under Regulation A. “Tier 1” offerings would be subject to the existing Regulation A framework, including the $5 million aggregate offering price limitation per 12-month period, with some minor modifications noted below. “Tier 2” offerings would expand upon the existing Regulation A framework, and would permit a company to raise up to $50 million in a 12-month period. Unlike Tier 1 offerings, Tier 2 offerings would benefit from federal preemption of state securities regulation.
In exchange for these benefits, Tier 2 offerings would be subject to a more robust disclosure and reporting regime than Tier 1 offerings. In addition, investors would be limited in the amount that they can invest in Tier 2 offerings to 10% of the greater of their annual income or net worth. This framework is intended to provide expanded protections for investors while offering companies a less costly and less burdensome method of raising capital than is available for offerings registered under Section 5 of the Securities Act. Among other proposed new investor protections, Tier 2 offerings would be subject to the following requirements:
- Audited financial statements would be required in offering statements; and
- Companies would be subject to ongoing disclosure and reporting requirements, including annual audited financial statements, semi-annual financial reports and current event updates similar to those that apply to public companies.
Under the proposed rules and amendments, both Tier 1 and Tier 2 offerings would require electronic filing of offering statements, but the rules would also permit companies to submit draft offering statements for nonpublic SEC staff review prior to filing. In addition, offerors engaged in either Tier 1 or Tier 2 offerings would be permitted to engage in “testing the waters” communications before and after the filing of an offering statement.
Although today’s proposal was approved unanimously, there are several important issues on which it appears that the Commissioners’ views could ultimately diverge, making them important topics for public comment. These issues include:
- the appropriate relationship between federal and state securities law regulation of Regulation A offerings, including whether all Regulation A offerings should benefit from preemption or, conversely, should be subjected to state securities law regulation, and how the proposal of the North American Securities Administrators Association (NASAA) to develop a coordinated state law process to review Regulation A offerings, should affect this analysis;
- whether the Commission should further subdivide Regulation A offerings into three tiers, with different offering amount limitations and investor protection features;
- the appropriate level and nature of disclosure that should be required in offering statements and in ongoing reports following a Tier 2 offering; and
- whether any other investor protections in Tier 2 offerings are necessary.