SEC adopts new rules to ease smaller companies’ access to capital

New rules adopted by the SEC on Wednesday are designed to make it easier for smaller companies to gain access to capital.

The rules, which are mandated by the Jumpstart Our Business Startups (JOBS) Act, will enable smaller companies to offer and sell up to $50 million in securities in a 12-month period, providing that eligibility, disclosure, and reporting requirements are met.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” SEC Chair Mary Jo White said in a news release. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

The rules update and expand Regulation A, an existing exemption from registration for smaller issuers of securities that has been available for small companies since 1936. Two tiers of offerings are provided for under the rules:

• 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.
• Tier 2: For offerings 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.

The rules will take effect 60 days after they are published in the Federal Register. The rules are a response to a significant drop in the number of Regulation A offerings utilized by smaller companies over the years.

Fewer offerings

In 1960, more than 1,000 companies filed Regulation A notifications with the SEC, Commissioner Luis Aguilar said in prepared remarks Wednesday. He said that number fell to 116 in 1997 and 19 in 2011. Just one of those offerings in 2011 was deemed qualified—meaning securities could actually be sold to investors.

“Although these numbers rose slightly between 2012 and 2014, when 26 offerings were qualified, the numbers still remain low,” Aguilar said. “If the success of a regulatory exemption is measured by how often it is used, then Regulation A has been failing.”

The Regulation A+ rules have certain basic requirements for offerings in both tiers, with additional disclosure and ongoing reporting requirements for Tier 2 offerings.

The final rules also provide for the pre-emption 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.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.