On December 18, the SEC proposed Regulation A plus, another JOBS Act amendment that seeks to liberalize the “old” regime and put us in good shape for the 21st century.
Existing Regulation A
Let’s first go over plain-old Reg. A as it exists today. This regulation provides an exemption from the full registration requirements of the Securities Act of 1933. Issuers who rely on Reg. A are limited to $5 million dollars over a 12-month period and are required to file a simplified registration state 3ment with the SEC. Reg. A brings two major advantages:
- The securities are not restricted (i.e. holders can resell them, so there is more liquidity).
- Issuers are not required to comply with the ongoing reporting and Sarbanes-Oxley Act obligations that a full-blown registration would entail.
Reg. A had one major shortcoming, however: it did not preempt state “blue-sky” regulations. Thus, an issuer who wanted to rely on Reg. A, even to “test the waters” and solicit interest from investors on a non-binding basis, had to ensure compliance with the laws of each state where it solicited investors. This is no easy task. In fact, due to this limitation, Reg. A was seldom used, as issuers preferred other Federal exemptions or simply chose to go the “intrastate” route.
The Proposed Rules
The proposed rules create a two-tiered approach to Reg. A: traditional Reg. A offerings, with the same $5 million limit over any 12-month period (Tier 1), and Reg. A+ offerings, with a $50 million limit over any 12-month period (Tier 2).
The greatest benefit (besides the larger amount) of the newly created Tier 2 (“Reg. A+”) is the preemption of state securities regulations for both offers and sales of securities. This means issuers can conduct a simple and inexpensive “test-the-waters” solicitation of interest and, once they decide to go forward, do all the necessary work for the Reg. A+ offering, without having to look up the laws of each state where investors reside, as is currently the case. (In fact, the SEC is proposing to preempt state laws for the solicitation, as opposed to the sale, of Tier 1 offerings, alleviating somewhat the burdens of current Reg. A.)
As is often the case, there is a price to pay for all this:
- registration and reporting with the SEC (though simpler than full-blown registration)
- investment limits (10% of investor’s net worth or income)
- audited financials, at least for the offering and the first fiscal year after its completion (issuers with fewer than 300 security-holders can do away with the reporting requirements by filing a form).
For smaller projects, like those we most frequently see at GroundBreaker, Reg. A+ may simply be unworkable, since the legal and audit costs could easily put the deal in the red. However, bigger projects with a more flexible timeline will most certainly benefit from this new regime. Reg. A+ is, all-in-all, a welcome addition to the existing legal regime.