New SEC Regulations Make It Easier for Small Companies to Raise Money
Overview
The United States securities market regulator has amended the regulations governing capital markets in order to give private companies greater access to capital and make it easier for certain companies to go public on US exchanges.
The changes cover registration requirements, disclosure and reporting requirements, and eligible shareholders, and liability issues.
The Securities and Exchange Commission (SEC) regulations (the Securities Act of 1933 or the Act) have directed the process and rules for access to the public capital markets in the United States. Recently adopted rule changes to have taken effect. The changes allow forward thinking companies to access to funding sources which previously were either too difficult or too costly to obtain.
The changes, known as Regulation A, are intended to ease the burden of Securities Act registration for small public offerings. These rule amendments, among other things, increase the amount of capital that can be raised in Regulation A offerings from $5 million to $50 million over a 12-month period.
An issuer looking to raise no more than $50 million in a registered offering should seriously consider conducting the offering pursuant to Regulation A. As compared to Securities Act registration, Regulation A has fewer strict disclosure requirements. It also permits issuers to use short-form registration to immediately register a class of equity securities under the Act, which would allow the issuer to list its shares on a national securities exchange if it otherwise meets applicable listing standards.
Additionally, even where there is no listing, the largest Regulation A offerings will benefit from State law registration exemptions, whereas registered offerings of securities that are not listed on a national securities exchange do not.
Consequently, conducting a Regulation A offering could result in the same public market for the offered shares as would be available in a registered offering, but with potentially lower offering and regulatory expenses and more limited exposure to liability under the Securities Act as compared to registered offerings.
Scope of the Changes
Offering Limits
The rule changes create a two-tiered framework for Regulation A offerings. Issuers in Tier 1 may offer and sell up to $20 million of securities over the course of a 12-month period, and issuers in Tier 2 may offer and sell up to $50 million of securities over a 12-month period. The key difference between the two tiers, other than the size of the offerings, is that a Tier 2 offering will subject the issuer to an ongoing reporting requirement, as discussed below.
With respect to an issuer’s initial Regulation A offering, and any additional offerings during the first 12 months thereafter, the rule amendments limit secondary sales to no more than 30 percent of the total offering price in the particular offering.
Eligible Issuers and Securities
The rule changes continue to limit the participation in a Regulation A exemption to entities organized in, and with their principal place of business in, the United States. Investment companies, blank check companies and issuers of fractional undivided interests in oil or gas rights also are disqualified from Regulation A.
Only equity securities (including warrants), debt securities and debt securities convertible or exchangeable into equity interests, as well as guarantees of any such securities, are eligible to be offered and sold pursuant to the Regulation A exemption.
Investment Limitations in Tier 2 Offerings
Prior to these rule changes, Regulation A did not limit the amount of securities an investor could purchase in an offering. The new rules continue that approach with Tier 1 offerings. In Tier 2 offerings, however, investors that are not “accredited investors,” as defined in Rule 501 of Regulation D, are limited to purchasing no more than 10 percent of the greater of their annual income (or revenues for legal entities) or net worth (or net assets for legal entities). This limitation does not apply to accredited investors or in the event the securities issued in the Tier 2 offering are to be exchange-listed.
Offering Process Prior to Filing
Testing the Waters
Potential issuers may “test the waters” prior to filing an offering circular under Regulation A. Regulation A issuers are not restricted in the pool of potential investors they can contact, and they can use “testing the waters” solicitation materials both before and after the offering circular is filed, subject to compliance with specific rules. Any such solicitation materials remain subject to the provisions of the federal securities laws.
Any solicitation materials used prior to the public filing of an offering circular must be included as an exhibit to the offering document.
Regularly released factual business communications would not constitute solicitation of interest materials under Regulation A. The SEC has observed that factual business communications typically include information about the issuer, its business, its financial condition and its products, and generally do not include predictions, projections, forecasts or opinions with respect to the valuation of a security.
Nonpublic Submission
The new rule amendments permit potential issuers that have never sold securities pursuant to a qualified offering document under Regulation A or an effective registration statement under the Securities Act to submit a draft offering circular for nonpublic Staff review. The initial nonpublic submission, along with any nonpublic amendments and correspondence submitted by or on behalf of the issuer, must be made public at least 21 calendar days before the qualification of the offering circular. This timing requirement does not depend on whether or not the issuer conducts a road show.
Offering Document
Filing a Form 1-A
A company that wants to conduct an offering pursuant to Regulation A must file an offering statement with the SEC on Form 1-A by filing it electronically.
Part I of Form 1-A includes questions designed to help the potential issuer determine whether it is eligible to rely on the exemption. Part II of Form 1-A is contains the body of the disclosure document and financial statements and is called an “offering circular.” Part III includes attachments, containing the signatures, exhibits index, and the exhibits to the offering statement.
To obtain further information about the Regulation A, other SEC rules, related tax and accounting Issues, or business questions generally, please contact Dov Weinstein at Weinstein & Co.