On December 19, 2018, the Securities and Exchange Commission (SEC) adopted amendments to Regulation A to allow companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to use Regulation A to conduct securities offerings of up to $50 million in a 12-month period without Securities Act registration. Regulation A provides an exemption from the registration requirements of the Securities Act of 1933 to companies organized in the United States or Canada for offers and sales of securities of up to $20 million for Tier 1 offerings and up to $50 million for Tier 2 offerings. Securities sold under Regulation A are deemed sold in a public offering and therefore are not “restricted securities” subject to Securities Act resale limitations. Prior to these amendments, Regulation A was not available to issuers that were already Exchange Act reporting companies, and its use has been modest. Following publication of the amendments in the Federal Register, which is expected to occur shortly, Exchange Act reporting companies will have the additional flexibility to use Regulation A when raising capital through the public markets.
Amendments to Regulation A
The final rules amend Rule 251 of Regulation A, which previously prohibited companies subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act from using Regulation A. In addition, Rule 257(b) is amended to specify that the duty to file periodic reports under Regulation A is deemed satisfied if the issuer is subject to the reporting requirements of the Exchange Act and has filed all reports required to be filed by Section 13 or 15(d) during the 12 months (or such shorter period that the registrant was required to file such reports) preceding the due date. The amendments use a 12-month lookback period to determine eligibility, which is consistent with the lookback period used in determining eligibility for Form S-8 and satisfaction of the “current public information” requirement of Rule 144. As a result of the amendments, an eligible Exchange Act reporting company will be able to rely upon the Regulation A exemption from registration, and so long as the issuer is current in its Exchange Act reporting, its Rule 257 reporting obligation will be deemed to be met. Rule 257(e) has also been amended to clarify that if an issuer terminates or suspends its reporting obligation under the Exchange Act and it is also eligible to suspend its Regulation A reporting obligation under Rule 257(d)(2), then the ongoing reporting obligations under Rule 257 will terminate.
The amendments to Regulation A will affect U.S. and Canadian reporting companies seeking to conduct a public offering within the Regulation A offering limit of up to $50 million. According to the SEC, during 2017 there were approximately 584 reporting companies with registered offerings of up to $50 million that may be eligible for Regulation A offerings under the amendments. Reporting company issuers that are ineligible for the short form registration process on Form S-3 or F-3 for offerings of up to $50 million may rely on Regulation A to raise capital in the public markets. In addition, issuers that are subject to the one-third market value limitation on primary issuances under the “baby shelf rules” of Form S-3 may want to consider conducting a Regulation A Tier 2 offering. Regulation A, particularly Tier 2, provides reporting companies with additional flexibility regarding “test-the-waters” communications as compared to registered offerings, particularly reporting companies that either do not qualify as an emerging growth company or that seek to solicit indications of interest from individual or small institutional investors. Subject to certain conditions, Regulation A issuers may solicit indications of interest from any investor prior to filing an offering statement—allowing companies to gauge investor interest prior to incurring substantial offering costs. (Note that test-the-waters materials used in conjunction with a Regulation A offering must be publicly filed if an issuer elects to proceed with the offering.) Reporting companies that elect to solicit indications of interest in connection with a Regulation A offering remain subject to Regulation FD. Regulation A does not permit at-the-market offerings.
The amendments to Regulation A are also expected to have an impact on reporting companies that offer securities not listed on a national exchange and use Tier 2 due to the blue sky preemption available to these issuers. The effect of the amendments should enable these reporting companies to expedite the offering process, allow a wider range of offering terms, enable offers of securities in multiple states to a broader range of investors, and result in legal and compliance cost savings.
Regulation A contains a safe harbor from integration with prior or subsequent offers or sales of securities registered under the Securities Act. The ability to alternate between Regulation A and a registered offering will provide reporting companies with greater flexibility in raising capital in the public markets.
The amendments will be effective once published in the Federal Register—which is expected shortly.
To access the SEC’s final rules regarding the amendments to Regulation A, please click here.