Smaller, non-exchange traded public companies will soon benefit from being able to utilize Regulation A to sell their securities in primary public offerings like uplistings and other types of capital raising transactions including rights offerings. On December 19, 2018, the SEC adopted final rules to amend Rule 251 of Regulation A under the Securities Act of 1933 to enable companies that are already subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 to use Regulation A, which they had not been able to use under the original JOBS Act of 2012. See SEC Release No. 33-10591. The SEC’s rule amendments were mandated under the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted by Congress earlier this year. The amendments to Regulation A will become effective when the new rules are published in the Federal Register, expected to occur sometime in January 2019.
The amendments to Regulation A would permit existing public companies to conduct on a Form 1-A offering statement (a) tier 1 securities offerings of up to $20 million in a rolling 12-month period, of which no more than $6 million may be sold by stockholders, and (b) tier 2 securities offerings of up to $50 million in a rolling 12-month period, of which no more than $15 million may be sold by stockholders. For more information about Regulation A, see our Olshan Client Alert, “SEC Adopts Regulation A+ to Exempt Offerings of up to $50 Million of Securities Annually in Groundbreaking Step,” March 2015, available here.
As a practical matter, it can be expected that most larger public companies raising no more than the maximum amount in a tier 1 offering will likely favor a traditional or publicly solicited private placement under Rule 506(b) or (c) of Regulation D or other Securities Act exemption that is more streamlined than Regulation A. Similarly, most larger public companies whose shares are traded on the New York Stock Exchange or Nasdaq Stock Market and have timely filed all of their periodic reports for the prior year will likely favor a short-form registration statement on Form S-3 (including via a shelf takedown) that incorporates business and financial information by reference from the companies’ prior and ongoing Securities Exchange Act filings.
For these reasons, we expect that smaller, non-exchange traded public companies will benefit most from the SEC’s new Regulation A rules.
Primary among these benefits are:
Public offerings free of state blue sky filings - State blue sky laws would be preempted for the offer and sale of securities in a tier 2 offering. For companies whose shares are quoted on the OTCQX, OTCQB or OTC Pink markets and have market capitalizations of less than $75 million, the rule amendments remove a significant hurdle in their growth strategy. Currently, in a broadly disseminated offering to public shareholders, whether in a traditional underwritten public offering in connection with an uplifting (where additional shareholders are often needed to list) or a rights offering (where there are already scattered shareholders), a 50-state blue sky compliance undertaking is cost prohibitive and time consuming. An issuer cannot readily identify all the states or prepare an accurate blue sky memo for a nationwide public offering marketing effort or constantly changing shareholder base in a rights offering. State blue sky preemption represents a potentially deciding factor for the use of Regulation A by non-exchange traded companies in these types of public offerings.
Ability to test the waters with retail investors - Companies would be able to solicit indications of interest (i.e., “test the waters”) with potential investors prior to filing their offering statement in a Regulation A offering. Importantly, testing the waters outreach would not be limited to qualified institutional buyers and institutional accredited investors, as it would be with a Form S-1 registration statement, and will soon include retail and small institutional investors.
Possibility of lighter SEC review comments - Our experience has found that the SEC has a special interest in assisting smaller publicly traded companies. In that regard, the SEC review process for Regulation A offerings has been more concerned with larger substantive disclosure issues in recognition of the more limited management, personnel and professional advice available to these companies compared to larger public companies.
The amended Regulation A rules will continue to make Regulation A unavailable for foreign private issuers, SPACs and BDCs, whether public or otherwise, and will not allow an already public company to submit a draft offering statement for non-public review by the SEC on its first sale of securities under Regulation A (if it previously sold securities under a Securities Act registration statement).
Logically, the SEC is also amending Rule 257 to clarify that existing public companies currently filing Securities Exchange Act reports would have no extra reporting obligations following their Regulation A offering.
Although the amended Regulation A rules are final, the SEC has included a 30-day “look-back” period in the adoption release in which it has requested public comment to further evaluate the accuracy of reporting and cost burden estimates and suggestions for reducing these and other information collection burdens of the new rules on public companies.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...