The Expansion of Regulation A

On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A allowing U.S. and Canadian companies that file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to conduct securities offerings using Regulation A. The amendments were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018.

Regulation A is available to companies organized in and with their principal place of business in the United States or Canada. Regulation A provides an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings, in a twelve-month period. Prior to the newly adopted amendments, Regulation A was not available to SEC reporting companies.

As discussed in more detail below, the amendments may be particularly attractive to certain types of reporting companies, including reporting companies that are not listed on a national securities exchange (such as companies that trade on OTC markets), reporting companies that are unable to, or are limited in their ability to, use Form S-3 or F-3 shelf registration, and reporting companies that became reporting companies in connection with a Regulation A offering.

The adopting release relating to the amendments is available here. The SEC press release announcing adoption of the amendments is available here. The amendments will become effective immediately upon publication of the adopting release in the Federal Register, and will not be subject to a public comment period. [1]

Summary of the Rule Amendments

The amendments revise Rule 251 of Regulation A to delete Rule 251(b)(2) and allow eligible Exchange Act reporting companies to use the exemption provided by Regulation A. Conforming changes are made to Item 2 of Part I of Form 1-A, which lists the issuer eligibility criteria to use the form.

Additionally, the amendments add a new paragraph to Rule 257(b) of Regulation A, with respect to Tier 2 offerings, to deem an Exchange Act reporting company issuer as having met its periodic and current reporting requirements under Rule 257 if the issuer meets the reporting requirements of Section 13 of the Exchange Act. The amendments use a twelve-month look-back period for this purpose, consistent with the look-back standard applied in SEC rules in other contexts such as Form S-8 eligibility and the Rule 144 “current public information” requirement.

Potential Impact of the Amendments

The SEC adopted its “Regulation A+” amendments to Regulation A in 2015, pursuant to the mandate of the Jumpstart Our Business Startups (JOBS) Act that was enacted in 2012. Since then, offerings under Regulation A have seen a relatively modest uptick in the marketplace. Many Regulation A+ offerings have not performed well, and there has been very limited participation in the Regulation A+ market by underwriters and other financial intermediaries thus far. These factors, as well as the low limits on offering amounts and the inability of reporting companies to use Regulation A, have likely contributed to the lukewarm reception exhibited towards Regulation A+ offerings. In addition, the JOBS Act introduced a number of changes that made it easier for most companies to go public using a traditional IPO (through creation of an “IPO on ramp”) and also made changes to Regulation D and other measures that have made it easier to conduct private offerings and permit companies to stay private longer. The market for traditional IPOs and Section 4(a)(2) and Regulation D private placements has generally been strong over the last several years. While there have been some areas where Regulation A+ offerings have gained traction (smaller REITs being an example), Regulation A+ is still trying to find its place in the market.

While the new amendments are unlikely to result in a sea change in utilization of Regulation A, they are certainly helpful revisions. Among those companies most likely to welcome the new amendments are reporting companies that are not listed on a national securities exchange, such as reporting issuers currently trading on OTC Markets, because blue sky preemption is available for Tier 2 Regulation A offerings, but blue sky preemption is generally not available for SEC registered offerings by non-exchange-listed issuers. In addition, reporting companies that are not eligible to conduct shelf offerings on Form S-3 or F-3 or whose ability to conduct primary offerings off a shelf registration statement, is limited to one-third of their public float by the “baby shelf” provisions of Instruction I.B.6 to Form S-3 or Instruction I.B.5 to Form F-3, may be more inclined to consider a Regulation A offering as an alternative to a traditional registered offering. It is worth noting, however, that Regulation A cannot be used to conduct “at-the-market” offerings. Issuers that previously conducted a Regulation A+ “mini-IPO” type offering and listed on a stock exchange in connection with that offering may also welcome the ability to continue using Regulation A.

Among the benefits of Regulation A offerings is the ability to conduct test-the-waters type activity with all types of investors, including retail investors (instead of testing-the-waters activity being limited to qualified institutional buyers and institutional accredited investors, as is the case with emerging growth companies under the JOBS Act). And, as discussed above, Regulation A can offer blue sky benefits to companies that do not qualify for state blue sky law preemption for their registered public offerings because they are not listed on a national securities exchange. In addition, unlike registered offerings, Regulation A offerings are not subject to Section 11 liability under the Securities Act.

One change the SEC did not make in connection with the new amendments was to increase the Regulation A Tier 2 offering limits. The JOBS Act requires the SEC to review the $50 million Tier 2 offering limit every two years. In the adopting release relating to the amendments, the SEC said it will conduct its review of the offering amount limits in connection with its next review beginning in 2019. A future determination by the SEC to increase the $50 million Tier 2 limit might go a long way towards facilitating greater market adoption of Regulation A offerings and attracting more participation by both issuers and underwriters.

Special thanks to Thurston Hamlette in New York for summarizing the SEC’s amendments to Regulation A and the nuanced implications for those who may seek to engage in a securities offering in reliance on the amendments.

Endnotes

1The amendments to Regulation A will become effective immediately upon publication in the Federal Register, and will not be subject to a comment period. Publication in the Federal Register is expected to occur in early to mid-January 2019 (subject to SEC operational delays related to the on-going partial U.S. federal government shutdown).(go back)