Late last month, the Securities and Exchange Commission adopted final rules to facilitate smaller companies’ access to capital and provide investors with more investment choices.
The new rules, mandated by Title IV of the Jumpstart Our Business Startups Act, also known as the JOBS Act, update and expand Regulation A, an existing exemption from registration for smaller issuers of securities.
The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.
The final rules, often referred to as Regulation A+, provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association. The rules will become effective 60 days after publication in the Federal Register.
Alex Castelli, a partner with CohnReznick LLP and leader of the firm’s Technology and Life Sciences Industry Practice, believes the new regulations will have a stimulating effect on middle-market and small-business investment.
“The old Reg A allowed private companies to raise up to $5 million from accredited investors, and now the new Reg A+ allows private companies to raise up to $50 million from both accredited and non-accredited investors,” he said in an interview last week. “It widened the investor pool and it loosened a lot of the previous restrictions and reporting.”
He pointed out that the old Reg A required companies to register in every state in which they were selling securities. “It was costly and time consuming,” said Castelli. “Now in certain offerings within Reg A+, you can preempt the state registration. What they did was they established two tiers, Tier 1 and Tier 2. Tier 1 is up to $20 million. That requires state registration, very similar to the previous Reg A. Type 2 allows you to go up to $50 million. In that situation you don’t have to register in every state.”
He noted that in Tier 2, companies have to provide offering circulars for the SEC to review along with financial statements. “There are two years of audited statements that are required for Tier 2,” said Castelli. “For Tier 1, they just require two years of GAAP statements. So you can see some of the reporting is lightened up. Then the ongoing reporting is really just sitting in the Tier 2. It’s annual and semiannual reporting, and also current reporting. It’s very similar, but much less. It’s similar to a 10K, 10Q or an 8K. but much less disclosure. It lowers the ongoing compliance costs. The other thing too is that the securities that were sold under Reg A+ are unrestricted unless the company restricts them under Rule 144. The rules go into effect 60 days after they’re published in the Federal Register. So we’ll see what the impact is in practice.”
Castelli noted that the SEC is trying to strike a balance between investor protection and access to capital for companies.
Reg A+ has been compared to crowdfunding, but Castelli sees some important distinctions. “It’s a standard investment, but the reason why it’s been analogized to crowdfunding is because nonaccredited investors are able to invest,” he said. “That was the whole concept behind Title 3. These are freely tradable securities. They’re not on a national exchange, but they do get registered once a company hits a certain threshold. A lot of rules have been written, and I think they’re probably going to be refined when this goes into practice. It’s a positive movement for emerging growth companies. But it’s hard to tell right now how it’s going to be embraced once it becomes effective.”
Accounting firms like CohnReznick will be able to point their clients to Reg A+ as a way to raise funds. “Hopefully it will help private companies access capital, and I think anything that promotes capital formation is positive,” said Castelli. “It will stimulate the middle market. How it impacts us directly is it will help our clients, and assuming they use it, it’s an opportunity for our clients.”
As for other accounting firms, Castelli thinks it’s a good idea to inform clients about the new rules. “We should inform our clients about Reg A+ and see if it’s a good fit for them,” he suggested. “Each situation is so different. It may work for some companies and not others.”
