Rules proposed Wednesday by the SEC would build upon the Regulation A exemption with the intention of increasing smaller companies’ access to capital.
The proposed rules would implement part of the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106, by making the Regulation A exemption more useful to small companies seeking capital. Regulation A currently allows unregistered public securities offerings of up to $5 million in a 12-month period, including up to $1.5 million offered by security holders of the company.
The proposed rules would create two tiers of Regulation A offerings: Tier 1 would consist of offerings currently covered by Regulation A. Tier 2 would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million offered by security holders of the company.
Companies engaging in offerings of $5 million or less could elect whether to proceed under Tier 1 or Tier 2. Tier 1 and Tier 2 offerings would be subject to basic requirements—including eligibility and disclosure rules—drawn from the existing Regulation A provisions. Regulation A also would be updated to:
- Allow companies to submit draft offering statements for nonpublic SEC review before filing.
- Permit use of solicitation materials to “test the waters” for potential interest in the offering before and after filing of the offering statement.
- Modernize the qualification, communications, and offering process.
Tier 2 offerings would be subject to additional requirements:
- A purchasing limit for investors of no more than 10% of their annual income or net worth—whichever is greater.
- An audit requirement for the financial statements included in the offering circular.
- The company would be required to file annual and semiannual ongoing reports and current event updates, similar to those required for public company reporting.
“In shaping this proposal, we sought to develop an effective, workable path to raising capital that, very importantly, also builds in necessary investor protections,” SEC Chairman Mary Jo White said in a statement.
Regulation A offerings have been rare in recent years. Just 19 qualified Regulation A offerings were held from 2009 to 2012, with a total offering amount of about $73 million, according to the SEC.
By comparison, about 27,500 offerings of up to $5 million were undertaken during that period claiming a Regulation D exception, with a total offering amount of about $25 billion.
The SEC will welcome public comment on the proposal for 60 days after it is published in the Federal Register.
—Ken Tysiac (email@example.com) is a JofA senior editor.