Regulation A is a conditional securities exemption allowing for public offers and sales of up to $5 million dollars of securities in a 12-month period. To be eligible to use Regulation A a company must be organized under the laws of the United States or Canada, must not be an investment company or blank check company and must not be subject to the periodic reporting requirements of the Securities Exchange Act.
Conducting a Regulation A offering is somewhat analogous to conducting a registered offering, though much simpler in form and substance, and is often referred to as a “mini-registration”.
In a Regulation A offering a company must prepare and file an offering statement with the Securities and Exchange Commission. An offering statement requires disclosures similar to those made in a registration statement, including disclosures regarding a company’s business and financial condition, its officers, directors and principal stockholders, risk factors, a description of the use of offerings proceeds and so on. An offering statement also requires the filing of certain exhibits and the inclusion of financial statements, which can be unaudited but must be prepared in accordance with generally accepted accounting principles.
Once a company’s offering statement is on file it is reviewed and qualified by the Commission, similar to the process of a registration statement being reviewed and declared effective. After the offering statement is qualified an offering circular, which makes up part of the offering statement, must be delivered to prospective investors prior to any securities being sold.
Thereafter the company must file reports with the Commission detailing the securities sold and the use of proceeds from those sales. The reports must be filed every six months until substantially all of the proceeds from the offering have been applied.
Notwithstanding the sales and use of proceeds reports, and unlike in a registered offering, once a Regulation A offering is complete there are no ongoing reporting obligations; no current, quarterly or annual reports to file (unless of course Exchange Act registration is triggered by some other means, such as by crossing the shareholder threshold required for registration). What’s more, any securities sold in a Regulation A offering are unrestricted and may be freely transferred in a secondary market transaction.
Another way in which Regulation A offerings differ from most other offerings is that Regulation A permits a company to gauge investor interest, or to “test the waters”, by means of general solicitation or general advertising prior to the filing of an offering statement. This ability to test the waters is not without limitation however, for example any written documents or scripts of oral presentations must be filed with the Commission prior to their first use. In addition, a company must also comply with the securities laws in each state in which an offer of securities is to be made, some of which do not permit general solicitation or general advertising.
One other item of note, there are also certain instances in which Regulation A can be used for secondary offerings, allowing shareholders resell up to $1.5 million of securities in a 12-month period.
Even though Regulation A does offer a simpler alternative to a full-scale registered offering it’s hardly ever used, in part because of its $5 million dollar offering limitation. In 2010 there were 25 initial Regulation A offerings filed with the Commission, but only 7 of these offerings were qualified.
A Regulation A Redux
The JOBS Act adds a new Section 3(b)(2) to the Securities Act which calls for the Commission to implement an exemption for the public offer and sale of up to $50 million of securities in any 12-month period. There is no required time frame for implementation of this exemption.
The requirements of the new exemption start out much like an enhanced version of Regulation A. The securities, which can be equity securities, debt securities or debt securities convertible into or exchangeable for equity securities, may be publicly offered and sold and will thereafter be freely transferable (they will not be restricted securities). Additionally, subject to any terms or conditions that the Commission may prescribe, companies that wish avail themselves of the new exemption will be permitted to “test the waters” prior to undertaking an offering.
Similar to Regulation A, the new exemption contemplates the preparation and filing of an offering statement, the form and content of which the Commission will prescribed, but which may include a description of the company’s business and financial condition, its corporate governance principles, use of proceeds and audited financial statements. In addition, the exemption requires that companies file audited financial statements with the Commission on an annual basis and provides that the Commission may also require additional periodic disclosures regarding the company’s business and financial condition, its corporate governance principles and use of the offering proceeds.
Unlike Regulation A, if the securities under the new exemption are offered and sold on a national securities exchange or to qualified purchasers then they will be “covered securities” and exempt from the state securities laws.
The Commission also has the discretion to establish disqualification provisions under which the new exemption would not be available to certain companies or their affiliates for reasons substantially similar to the bad actor disqualification provisions to be established under the Dodd-Frank Act (which are themselves based on the disqualification provisions of Regulation A).
Lastly, every two years the Commission will have to review and increase, if appropriate, the $50 million offering limitation, or, if not increased, report to Congress as to why.