SEC Adopts Final Rule Expanding Regulation A Exemption to Exchange Act Reporting Companies
The Securities and Exchange Commission (SEC) last week adopted a final rule amending Regulation A to broaden eligibility for its exemption from full SEC registration. The amendments will soon allow "reporting companies"—entities subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act)—to rely on the Regulation A exemption from some SEC reporting requirements for securities offerings.
The new rule amends Regulation A—which provides an exemption for offerings up to $50 million in a 12-month period—to "provide reporting companies additional flexibility when raising capital," stated SEC Chairman Jay Clayton.
The amendments—effective once published in the Federal Register, expected in the coming weeks—provide that compliance with Exchange Act reporting requirements will also cover the reporting requirements under Regulation A.
The SEC anticipates the amendments to affect U.S. and Canadian reporting companies seeking to conduct a public offering within the Regulation A offering limits.
Amendments to Regulation A Eligibility
The SEC adopted amendments to Regulation A in 2015 exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually, and establishing issuer eligibility requirements and ongoing reporting requirements for issuers in Regulation A offerings. Regulation A offerings are intended to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of an SEC registration, while allowing non-accredited investors to participate in the offering. Under current Rule 251(b)(2), Regulation A is not available to companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act. However, as mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Economic Growth Act), which President Trump signed into law on May 24, 2018, the SEC amended Regulation A by deleting Rule 251(b)(2), thereby permitting Exchange Act reporting companies to offer and sell securities in reliance on the Regulation A exemption. The SEC also made conforming changes to Form 1-A to address this change in eligibility.
The amendments make clear that Exchange Act reporting companies relying on Regulation A are required, at a minimum, to include in their Form 1-A filing for a Regulation A exempt offering financial statements for the two previous fiscal years (or a shorter period during which they have been in existence). The financial statements must, at a minimum, be prepared in accordance with the form and content requirements of Part F/S of Form 1-A. Under Rule 252 of Regulation A, however, issuers must include in their offering statement “any other material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” As a result, it may be necessary for Exchange Act reporting companies to include any more recently issued audited or reviewed financial statements prepared in accordance with the standard required for the company’s Exchange Act reports.
Regulation A Ongoing Reporting Requirements for Exchange Act Companies
Under current Rule 257(b), an issuer that has filed an offering statement for a Tier 2 offering that has been qualified pursuant to Regulation A must file specified periodic and current reports with the SEC. The Economic Growth Act provides that an issuer’s Regulation A reporting obligations will be deemed satisfied if the issuer "meets" its Exchange Act reporting requirements. Accordingly, the SEC amended Rule 257(b) by adding new subsection (6) in order to specify that the reporting requirements under Rule 257 will be deemed satisfied if the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and, as of the due dates for each Form 1-K and Form 1-SA (i.e., the annual and semi-annual report forms for Regulation A offerings, respectively), has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or shorter period that the registrant was required to file such reports) preceding the due date. In light of this change, the SEC deleted Rule 257(d)(1), which currently provides for an automatic suspension of the duty to file reports under Rule 257 if and so long as the issuer is subject to the duty to file reports required by Section 13 or 15(d) of the Exchange Act. The SEC also made conforming changes to Rule 257(e) to clarify the reporting requirements in the event an Exchange Act reporting company terminates or suspends its reporting obligations under the Exchange Act.
The SEC's Adopting Guidance
The adopting release contained clarifying guidance on the application and use of Regulation A following the amendments:
New or Revised Accounting Standards
Part F/S of Form 1-A permits issuers, where applicable, to delay the implementation of new accounting standards to the extent such standards provide for delayed implementation by non-public business entities, similar to accommodations for emerging growth companies under Section 102(b) of the Jumpstart Our Business Startups Act. The SEC clarified in the release that this accommodation will not apply to Exchange Act reporting companies.
The adopting release also clarifies that a Canadian reporting company issuer, whether or not filing with the SEC under the Exchange Act multijurisdictional disclosure system (“MJDS”), will be deemed to have met its Rule 257 reporting obligations so long as it is current in its applicable Exchange Act reporting obligations. The disclosure requirements for Canadian issuers reporting under the MJDS will continue to be established under home country standards.
Securities "Held of Record" for Section 12(g) Purposes
Securities issued in a Tier 2 offering under Regulation A by certain smaller reporting companies may, subject to certain conditions, be excluded from the count of securities “held of record” for purposes of Section 12(g) of the Exchange Act. Because this section was not amended, securities issued by Exchange Act reporting companies in a Tier 2 offering would be excluded from the “held of record” count.
Impact of the Changes
As a result of these changes, an Exchange Act reporting company will be eligible to rely on the Regulation A exemption from registration for securities offerings within the Regulation A threshold. Upon qualification of a Tier 2 offering, an Exchange Act reporting company will become subject to the ongoing reporting requirements of Regulation A. However, as long as the issuer remains current in its Exchange Act reporting, it can rely on meeting its Exchange Act reporting requirements to satisfy its ongoing reporting obligation under Regulation A.
The amendments may generally afford issuers additional flexibility in raising capital at lower costs. As noted in the final rules adopting release, the SEC anticipates that “the amendments will likely have the most impact on issuers in offerings of securities that fall within Regulation A offering limits and that are not listed on a national securities exchange,” as Tier 2 securities offering will qualify for blue sky preemption, which is generally not available for non-exchange-listed securities sold in registered offerings.
On the other hand, the SEC believes that the amendments may affect Regulation A issuers that are not reporting companies to the extent that they compete for capital with reporting companies that are newly eligible to use Regulation A. Moreover, in the SEC’s view, the flexibility afforded by the amendments may lead some new issuers that are not reporting companies and that have not previously conducted a public offering to seek Regulation A financing or to become a reporting company.
Ballard Spahr's Securities and Capital Markets Group advises private and public companies through all stages of development and capital-raising activities. The Group's attorneys help clients comply with public reporting, proxy, and disclosure obligations.
Copyright © 2018 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.