This week marks the three-month anniversary of the effective date of Regulation A. Of course, given this limited experience, it may be premature to comment on market developments. Instead, below we summarize significant developments.
Small Entity Compliance Guide
Immediately prior to the effective date, the Securities and Exchange Commission published this Small Entity Compliance Guide: http://www.sec.gov/info/smallbus/secg/regulation-a-amendments-secg.shtml. The guide provides a helpful overview of the regulation, the disclosure requirements and the subsequent reporting requirements.
Compliance and Disclosure Interps
Shortly following the effective date, the Staff of the Commission provided guidance on various aspects of the application of the regulation in the form of Compliance and Disclosure Interpretations, which are accessible here: http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#182.01.
In July, the Commission’s Office of Investor Education and Advocacy issued an Investor Bulletin (see: http://www.sec.gov/oiea/investor-alerts-bulletins/ib_regulationa.html) that highlights the differences from an investor’s perspective between a Tier 1 and a Tier 2 offering, including the disclosure and ongoing reporting requirements and the investment limitation for Tier 2 offerings.
Reg A Litigation
In the meantime, the litigation by Montana and Massachusetts challenging the Commission’s definition of “qualified purchaser” in the context of Tier 2 Regulation A offerings is proceeding. The opening brief presents some interesting arguments. For example, in the brief, petitioners note that the legislative history of NSMIA suggests that state preemption was intended to be limited to qualified purchasers, which were understood to be investors with certain levels of wealth, income and financial sophistication. The brief further notes that years ago, when the Commission had proposed to define “qualified purchaser,” it had proposed to limit qualified purchaser to “accredited investor.” This had been premised on the notion that these were investors capable of fending for themselves and who did not require the protections afforded by state securities registration. Interestingly, this would appear to undercut the arguments being advanced by the states. If, from a public policy perspective and based on legislative history, the term “qualified purchaser” was intended to identify purchasers that did not require the protections associated with state registration, then, any offeree or purchaser in a Tier 2 would meet this standard. Offerees and purchasers in Tier 2 offerings have the benefit of an offering statement that must comply with extensive disclosure requirements, including an audited financial statement requirement, and that must be qualified by the Commission. It stands to reason that such an offeree or purchaser would not need to negotiate for himself or herself with the issuer in order to obtain information about the issuer or the investment. This information would be publicly available. The disclosure requirements of a Tier 2 offering serve to level the playing field between the issuer and potential purchasers. Potential purchasers would not be left to “fend for themselves” in a Tier 2 offering. The brief points to exempt offerings made pursuant to Section 4(a)(2) and Rule 144A and the investor sophistication requirements in the context of each such exempt offering.. However, there are no disclosure requirements in the case of either a 4(a)(2) or a Rule 144A offering and, of course, no Commission review. It’s not clear why either would be analogous to a Tier 2 Regulation A offering. The brief notes that any definition of “qualified purchaser” ought to be consistent with the public interest and the protection of investors. It would seem that the disclosure requirements, investment limitations (in the case of non-accredited investors), and the transparency afforded by the ongoing reporting requirements provide robust investor protections.
FINRA recently published Regulatory Notice 15-32 on Regulation A Offerings (see: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-15-32.pdf). The Notice reiterates that FINRA’s Corporate Financing Rules apply to Regulation A offers involving the participation of a FINRA member firm. The Notice also emphasizes that FINRA’s communications rule (Rule 2210) is applicable to materials used in connection with a Regulation A offering and, as such, are subject to content standards (all materials must be fair, balanced, and not misleading), may be subject to registered principal pre-approval and to filing with FINRA.
Given the proliferation of web-based offers or “test-the-waters” type communications purportedly involving Regulation A offerings, the reminder regarding the applicability of the FINRA communications rules is especially timely.