Today, the board of directors of the North American Securities Administrators Association, Inc. (NASAA)  released materials for public comment relating to a new coordinated review by state securities regulators of Regulation A+ (Section 3(b)(2)) offerings.

As we have written in prior posts, Title IV of the JOBS Act provides an exemption under Section 3(b)(2) for offerings by non-reporting companies raising up to $50 million in proceeds relying on a framework similar to that contained in current Regulation A.  The SEC has not yet released proposed rules to implement this mandate.  Certain of these offerings may be subject to state securities registration requirements.  A coordinated review process would streamline and facilitate any such offerings.  The materials may be accessed here:  http://www.nasaa.org/27427/notice-request-public-comment-proposed-coordinated-review-program-section-3b2-offerings/.

Given the haste with which the JOBS Act made its way through Congress, it is not surprising that there are some details that may have been neglected.

Rep. McHenry has introduced a bill (H.R. 701), co-sponsored by Representatives Schweikert, Eshoo, Garrett, and Scott, which would direct the Securities and Exchange Commission to implement rules for Section 3(b)(2) (or Regulation A+) by October 31, 2013.

Rep. Womack’s bill (H.R. 801) would address the inadvertent omission of savings and loan holding companies from the deregistration provisionsconsistent with the JOBS Act legislative history.

Many banks have taken advantage of the provisions of the JOBS Act regarding the holder-of-record threshold to deregister and terminate their registration.  Banks may want to consider their capital-raising alternatives going forward.  A community or small bank that is no longer subject to Exchange Act filing requirements may consider a Rule 506 offering.  A Rule 506 offering to accredited investors will be an attractive alternative for many banks.  However, capital-raising always has been a challenge for community banks.  Some institutional investors may be reluctant to invest in “restricted securities” if these investors are subject to caps or limitations on the amount of restricted securities that they may hold in their portfolios.  Some banks may want to focus on issuances at the bank level (not the holding company level) and rely on the Section 3(a)(2) exemption available to banks.  Section 3(a)(2) of the Securities Act exempts from registration any security issued or guaranteed by a national bank, or any banking institution organized under the law of any state, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar official.  To qualify for the exemption under Section 3(a)(2), the institution must meet two requirements: (i) it must be a national bank or any institution supervised by a state banking commission or similar authority and (ii) its business must be substantially confined to banking.  Securities issued by bank holding companies are not exempt from registration under Section 3(a)(2).  Securities issued pursuant to this exemption will not be considered “restricted securities” and, as a result, there may be more investor interest.

Banks would benefit from a specific exemption under Section 3(b)(2).  The Commission has an opportunity in connection with its 3(b)(2) rulemaking (required by Title IV of the JOBS Act) to consider a streamlined approach for banks to offer securities publicly (relying on a framework similar to that provided by existing Regulation A), which will not be “restricted securities.”  Under existing Regulation A, an issuer must prepare an offering statement.  Banks, however, are already subject to significant regulatory oversight and make available financial and other information to their regulators (and bank call reports are accessible to investors).  It would make good sense to consider a tailored 3(b)(2) exemption for banks, with reduced information requirements, especially given that many banks will have availed themselves of the modified holder-of-record provisions to terminate their filing obligations, but still need access to capital.

We hope that the SEC engages actively with the securities exchanges to facilitate the listing of securities of issuers concurrently with the pricing of their Regulation A+ (a/k/a 3(b)(2)) offerings.  The JOBS Act seems to contemplate that some issuers will pursue Regulation A+ offerings, not seek exchange listings and choose to remain non-reporting companies.  However, the Act also contemplates that an issuer might conduct a Regulation A+ and concurrently list its securities on a national securities exchange.  In fact, one of the paths to preemption depends on a concurrent exchange listing.  So, how will this accomplished?  The current approach would seem impractical.  Now, an issuer would have to file a registration statement on Form 10 (in addition to having prepared, filed and had reviewed an offering statement for the Regulation A+ offering).  That is duplicative and costly.  Exchange listings in connection with Regulation A+ offerings will, in almost all instances, increase the universe of potential investors, provide significantly enhanced after-market liquidity, and encourage after-market research analyst coverage, which would otherwise be sparce or non-existent.  Facilitating exchange listings also would serve to support the SEC’s investor protection objectives.  A Regulation A+ offering with a contemporaneous exchange listing is a sounder approach than say, a reverse merger.

 

The JOBS Act directed the GAO to undertake a study concerning the factors impeding greater use of currently Regulation A.  The GAO study examines trends in Regulation A offerings, noting that the number of offerings increased from 1992 through 1997.  This increase followed the SEC’s changes to the offering ceiling for Regulation A offerings from $1.5 million to $5 million.  Since 1997, however, the number of Regulation A offerings has declined.  The study notes that issuers have tended to favor Regulation D offerings.  The report cites a number of factors that likely have contributed to the lack of interest in using Regulation A for capital-raising.   For example, the report cites the delays associated with the SEC review of Regulation A offering statements (whereas an issuer faces no disclosure requirements in connection with a Regulation 506 offering made to accredited investors) and, of course, the time-consuming and expensive process for complying with state securities laws.  The report details a number of significant advantages associated with Regulation D offerings.

The report does lead one to consider the relative attractiveness of various offering alternatives.

For example, if an issuer (not a reporting company) is prepared to make its offering available only to (verified) accredited investors, the issuer soon will be able to solicit and will not have specific disclosure requirements.  Of course, the securities sold in the Rule 506 Regulation D offering will be restricted.  No limit on dollars that can be raised.

If the issuer completes one or many such offerings, provided it stays below the new 12g threshold, it will not be required to furnish periodic information to the SEC.

An issuer that is not a reporting company might undertake crowdfunding offerings, through a funding portal or a broker-dealer, to investors meeting certain standards, but then the issuer must comply with certain disclosure requirements in connection with the offering, and also be subject to ongoing albeit limited information requirements.  The securities sold in the crowdfunding offering will be restricted.  The dollar amounts are small.

Under the JOBS Act, in conjunction with the new Regulation A+ or 3(b)(2), the SEC has discretion to require that the offering document contain audited financials, and that the issuer subsequently make periodic disclosures.  Will new 3(b)(2) be appealing?  What are the trade-offs for an issuer?  If the issuer wants to avoid the costs associated with state blue sky review, then the issuer will either contemporaneously list its securities on a national exchange, or sell to “qualified purchasers.”  We don’t yet know who would be classified as a qualified purchaser.  The issuer could generally solicit.  The issuer will have to comply with specific disclosure requirements in connection with the offering, and, in addition, it will have ongoing disclosure requirements.  Of course, the securities sold will not be restricted securities.  Is it worth it?  Well, the answer to this question will depend largely on the approach taken by the SEC in its rulemaking on 3(b)(2).  Will some consideration being given to the fact that there was widespread support for amending Regulation A, even before the JOBS Act had materialized?  Will the SEC conduct some cost/benefit analysis and appreciate that if new 3(b)(2) is made sufficiently burdensome it will not provide the useful capital raising alternative that Congress and others had envisioned for emerging companies.  Let’s assume the SEC will exercise its discretion to require some additional disclosures.  At least, it would make sense to put a premium on clear, concise disclosure, which would be meaningful to investors.

We’re reggae fans, and fans of Reg A.  Chances are you may be more familiar with the offbeat rhythms of reggae, than with Regulation A.  Regulation A was intended to allow smaller businesses, including banks and bank-holding companies, access to the capital markets without subjecting them to the high costs associated with registered public offerings.  However, the relatively low $5 million threshold and potential need to comply with state blue sky laws has made Regulation A unappealing.  It was, as Jimmy Cliff sings, “A Hard Road to Travel.”  Title IV of the JOBS Act amends Section 3(b) of the Securities Act, by increasing the dollar threshold for a Regulation A-style offering (referred to as Reg A+ offerings).  Pursuant to Section 3(b)(2), an issuer will be able to offer and sell up to $50 million in securities within a 12-month period in reliance on the exemption.  The securities sold pursuant to the exemption will be offered and sold publicly (without restrictions on the use of general solicitation or general advertising) and will not be “restricted securities.”  The securities will be considered “covered securities” for NSMIA purposes (and not subject to state securities review) if:  the securities are offered and sold on a national securities exchange, or the securities are offered or sold to a “qualified purchaser” as defined under the JOBS Act.  A Reg A offering would provide a perfect capital-raising approach for an emerging company.  In fact, proposals to amend Reg A preceded the IPO “on-ramp” concept and the JOBS Act by at least 18 months.  Given that Reg A would provide a relatively simple capital formation approach, it is a shame that legislators did not include a timeline for Reg A rulemaking by the SEC.  Experience would suggest that the SEC will focus first on meeting the deadlines for rulemaking included in the JOBS Act, and address Reg A in due course.  While there may be “Many rivers to Cross” in order to get to a workable Reg A, we are hopeful that attention will turn to regulations that help operating companies and actually promote job creation.