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Raising Capital Through Exempt Offerings

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Regulation A+, Modernizing Regulation A

McBride law firm on JOBS ActTitle IV of the Jumpstart Our Business Startups Act (“JOBS Act”), popularly known as
Regulation A+, authorized the SEC to modernize and expand the existing Regulation A for offerings of up to $50 million.  On March 25, 2015, the SEC adopted final rules to implement the mandate, which will become effective 60 days after publication in the Federal Register.[1]

The final rules establish two tiers of offerings:

  • Tier 1: Annual offering limit of $20 million, including no more than $6 million on behalf of selling security holders that are affiliates of the issuer; and
  • Tier 2: Annual offering limit of $50 million, including no more than $15 million on behalf of selling security holders that are affiliates of the issuer.[2]

Reg A+ exemption is available to U.S. and Canadian companies but excludes, among others, SEC-reporting companies and certain “bad actors,” i.e., those subject to certain criminal convictions, certain court injunctions and restraining orders, and final orders of certain state and federal regulators, as well as certain SEC orders.[3]  Issuers are required to file offering statements on Form 1-A electronically on EDGAR at least 21 days before commencement of the offering, which consists of three parts: Part I contains basic issuer information; Part II contains balance sheets and financial statements, as well as certain disclosures, such as material risks, use of proceeds, issuer’s business, an MD&A (management’s discussion and analysis of financial conditions and results of operation)-type discussion, officers and directors compensation, beneficial ownership, related party transactions, and a description of the offered securities; and Part III containing exhibits and related materials.[4]  Issuers can also make pre-filing, non-public submissions of these documents for SEC review.[5]  Reg A+ permits issuers to “test the waters” or solicit interest in a potential offering either before or after the filing of the offering statement, as long as the solicitation materials are accompanied by a preliminary offering circular or contain a notice informing where and how the most current preliminary offering circular can be obtained.[6]  As in Reg A offerings, the securities in Reg A+ offerings may be offered and sold publicly and are not restricted securities.

There are some important differences between Tier 1 and Tier 2.  Specifically, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semi-annual, and current reports with the SEC, while Tier 1 issuers only need to provide an exit report within 30 days after the offering.[7]  Moreover, with the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors or limit the amount of securities they purchase to 10% of their annual income or net worth, whichever is greater,[8] to address potential investor protection concerns.  Issuers must notify investors of these limitations and may rely on a representation of compliance from the investor, unless the issuer knew such representation was untrue at the time of sale.[9]  Finally, Tier 2 offerings are exempt from state securities law requirements, but Tier 1 offerings remain subject to state requirements.  The rationale, according to the SEC, is that the lack of audited financial statements warrants additional investor protection in the form of state law, and because Tier 1 offerings are likely to be concentrated in fewer states, the cost of complying with state review is likely to be diminished for these types of offerings.[10]

Early press indicates much enthusiasm about Reg A+, and we expect to see a fair number of issuers using this exemption.  Nevertheless, because of the onerous disclosure requirements and ongoing reporting obligations in Tier 2 offerings, or the lack of state preemption in Tier 1 offerings, this exemption is likely to be used mostly at the higher end of each tier where the costs of compliance would be worthwhile.

 

If you have any questions about the content of this blog series or other securities law issues not discussed here, please contact us.

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

 

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

 

[1] See generally 80 Fed. Reg. 21,806, 21,868 (Apr. 20, 2015).

[2] 17 C.F.R. § 230.251.

[3] See id. §§ 230.262, .251(b)(8).

[4] See 80 Fed. Reg. 21,806, 21,903–15 (Form 1-A).

[5] Id. § 230.252(d).

[6] Id. § 230.255.

[7] Id. § 230.257.

[8] Id. § 230.251(d).

[9] Id.

[10] 80 Fed. Reg. 21,887.

photo credit: Meltwater Group listens to the Crown Prince of Norway via photopin (license)

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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