Regulation + | A New Look for an Old Exemption
In June of this year, the United States Securities and Exchange Commission (the “SEC”) implemented rules opening new avenues for potential equity raises by startup businesses. Pursuant to a mandate in Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012, the SEC’s final rules, commonly referred to as Regulation A+, expand upon existing Regulation A of the Securities Act of 1933 (the “1933 Act”) in order to allow startup companies to seek larger investments from a broader spectrum of investors. By way of background, the 1933 Act requires that issuer businesses either register or rely upon an existing exemption within the 1933 Act when offering to sell securities to potential investors. Traditionally, Regulation A of the 1933 Act provided businesses with an exemption from registration that permitted public offerings of up to $5 million of securities during a 12-month period. The new Regulation A+ dusts off and revamps the infrequently used exemptions under Regulation A in an effort to expand the potential upside for businesses that seek substantial funding, but do not want to bear all of the burdens and costs associated with registration of their securities.
A New Tiered System
Regulation A+ provides for two tiers of offerings, each having its own requirements. Tier 1 allows businesses to conduct security offerings of up to $20 million over a period of 12 months; while Tier 2 allows for security offerings of up to $50 million over a period of 12 months. Businesses making offerings up to $20 million have the option to elect whether to conduct the offering as a Tier 1 or Tier 2 offering, provided however, that businesses electing to conduct a Tier 2 offering are subject to additional SEC disclosure requirements, such as providing audited financial statements and filing annual, semiannual, and current event reports. In addition, Tier 2 offerings limit investment from non-accredited investors to 10 percent of the greater of the investor’s annual income or net worth. Although the disclosure requirements at the SEC level are significantly greater in a Tier 2 offering, one potential advantage presented by a Tier 2 offering is that, unlike Tier 1 offerings, Tier 2 offerings are exempt from state-specific Blue Sky Laws, eliminating the administrative burden of complying with state securities filing requirements. This will be an important area to keep an eye on, however, as several states have already challenged the implementation of this exemption, and others will undoubtedly follow suit.
Test the Waters before Jumping In
An additional advantage for issuers offering securities pursuant to Regulation A+ is the ability to “test the waters” to determine the market for a potential offering. Issuers contemplating a Regulation A+ offering can distribute solicitation materials prior to or following the filing of an offering circular for SEC review. While the ability to “test the waters” carries with it obligations on behalf of the issuer to disclose to, and keep current with, the SEC any solicitation materials used by the issuer, the opportunity for the potential issuer to gain a perspective as to the actual market for its offering could be an invaluable tool. Any solicitation materials used to “test the waters” must fit within requirements outlined in Regulation A+, and remain subject to other federal securities laws regarding fraud and misrepresentation.
Not a “One Size Fits All”
Although Regulation A+ offers a new capital generating option for startups, many startups, especially early-stage and seed-stage startups, may find those exemptions already offered pursuant to Rule 506 of Regulation D under the 1933 Act to be a better fit for their businesses due to the lower costs. Regulation A+ offerings not only present enhanced disclosure requirements for the offering when compared to Regulation D offerings, such offerings are also subject to the SEC staff review and comment process reserved for registered offerings. When all is said and done, the cost of conducting a Regulation A+ offering could potentially climb into the six-figures, and for that reason, Regulation A+ is most likely a tool for late-stage growth companies that desire to conduct a public offering, but do not want to go through the process associated with conducting an Initial Public Offering.
Although the purpose of Regulation A+ is to circumvent some of the more onerous requirements of registration, Regulation A+ offerings present complicated issues and disclosure requirements.
Don’t go it alone! To find out if Regulation A+ is a possibility for your business, or to discuss other avenues for equity offerings, please feel free to contact members of the Startup Team.
Angela B. Martin, Esq. Chair | 603-695-8527 | firstname.lastname@example.org
Harper R. Marshall, Esq. Vice-Chair | 603-695-8645 | email@example.com
Patrick C. Brady, Esq. | 603-695-8565 | firstname.lastname@example.org
Steve Cohen, Esq., CPA, LLM | 603-695-8504 | email@example.com
Sean P. Flanagan, Esq. | 603-695-8733 | firstname.lastname@example.org
Maurice P. Gilbert, CPA | 603-695-8612 | email@example.com
Claire R. Howard, Esq. | 603-695-8541 | firstname.lastname@example.org
Rebecca S. Kane, Esq. | 603-695-8635 | email@example.com
Margaret “Peg” O’Brien | 603-695-8631| firstname.lastname@example.org
Jennifer R. Rivett, Esq. | 603-695-8620| email@example.com
Teresa Rosenberger | Devine Strategies | 603-410-1702 | firstname.lastname@example.org
This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Devine Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.
Copyright © 2015 Devine Millimet & Branch, Professional Association