Can Regulation A+ Succeed Where Regulation A Failed?

Background

Regulation A, as it existed prior to the Final Rules, provided an exemption from registration requirements of Section 5 of the Securities Act for certain smaller securities offerings of up to $5 million by private companies. Historically, Regulation A has been rarely utilized as a capital raising tool. This lack of use is widely attributed to two factors: (i) the offering costs, and burden of SEC review, relative to the dollar amounts being raised, and (ii) the necessity of complying with state blue sky laws in each state where an offering is conducted. From 2012 to 2014 only 26 Regulation A offerings were qualified by the SEC.⁴

Title IV of the JOBS Act, entitled “Small Company Capital Formation,” was intended by Congress to expand the use of Regulation A by solving some of the perceived limitations of the exemption. Section 401 of the JOBS Act amended Section 3(b) of the Securities Act by designating existing Section 3(b), the SEC’s exemptive authority for offerings of up to $5 million, as Section 3(b)(1), and creating a new Section 3(b)(2).⁵ New Section 3(b)(2) directed the SEC to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period.⁶

Final Rules

Eligible Issuers

In order to be eligible to issue securities pursuant to the Regulation A+ exemption, an issuer must be organized in and with its principal place of business in the United States or Canada.⁷ The Regulation A+ exemption is unavailable to:

• An issuer that is already an SEC “reporting company”;
• An issuer registered or required to be registered under the Investment Company Act of 1940 (this includes Business Development Companies);
• An issuer that is a “blank check company”;
• An issuer of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights;
• An issuer that has not filed with the SEC the ongoing reports required by Regulation A+ during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports);
• An issuer that has been subject to an order by the SEC denying, suspending or revoking registration pursuant to Section 12(j) of the Securities Exchange Act of 1934 that was entered into within five years before the filing of the new offering statement; and
• An issuer subject to “bad actor” disqualification under Rule 262.⁸

Eligible Securities

The securities that may be offered pursuant to the Regulation A+ exemption are limited to equity securities, including warrants; debt securities and debt securities convertible into or exchangeable into equity interests, including guarantees of such securities.⁹ Asset-backed securities have been specifically excluded from the Final Rules.¹⁰

Read more: Can Regulation A+ Succeed Where Regulation A Failed

1. SEC Release No. 33-9741; Amendments to Regulation A; available here (the Final Rules).
2. H.R. 3606, available here.
3. SEC Release No. 33-9497; Proposed Rule for Small and Additional Issues Exemptions under 3(b) of the Securities Act; available here (the Proposed Rules).
4. SEC Public Statement, “Helping Small Businesses and Protecting Investors” dated March 25, 2015, available here.
5. Proposed Rules at I.A
6. Id.
7. Final Rules at II.B.1.; Securities Act Rule 230.251(b)(1)
8. Final Rules at II.B.1.; Securities Act Rule 230.251(b)(2)-(8)
9. Final Rules at II.B.2.; Securities Act Rule 230.261 (c)
10. Final Rules at II.B.2.