Today, the SEC released proposed rules to carry out the rulemaking mandate of Title IV of the JOBS Act.  The proposed rules preserve and modernize the current framework of current Regulation A.  The proposed rules would establish two tiers.  The first tier would preserve the current offering threshold in Regulation A, which permits an issuer to offer and sell up to $5 million in any 12-month period, including no more than $1.5 million in securities sold by selling stockholders.  Tier 1 offerings would be subject to state securities review.  The second tier would create an exemption for offerings of up to $50 million in any 12-month period, including no more than $15 million in securities sold by selling stockholders.

The proposed rules are intended to help increase access to capital for smaller companies.  The proposed rules also take into account all of the factors that were cited in the GAO Report on existing Regulation A.  The proposed rule aims to increase reliance on Regulation A.  Generally, the proposed rules build on the existing framework of Regulation A.  For example, the proposed rule would preserve the concept of “eligible issuer.”  The exemption will be available to non-reporting companies organized in the United States or Canada, and would exclude investment companies, companies delinquent in their filing requirements, and issuers subject to certain SEC orders.  An issuer would be required to prepare and submit to the SEC for review an offering statement.  The offering statement may be submitted confidentially to the SEC for its review.  The offering statement would then be filed electronically through EDGAR.  Consistent with current Regulation A, issuers would be permitted to conduct test-the-waters communications.

The proposed rules would incorporate a new investment limit.  The proposed rule would limit the permissible amount to be invested by any individual to the greater of 10% of the individual’s net worth or net income.  In addition, the proposed rules contain certain ongoing reporting requirements.  An issuer that has conducted a Regulation A offering will be required to make certain limited ongoing SEC filings.

In order to address the most significant impediment associated with current Regulation A, the proposed rule preempts state securities law review for Tier 2 Regulation A offerings (those up to $50 million).  The proposed rule does so by defining a “qualified purchaser” as any offeree or purchaser in a Tier 2 offering.

Consistent with existing Regulation A, the securities sold in a Regulation A+ offering will not be “restricted securities.”

We will provide a more detailed alert and analysis shortly.

Link to the SEC’s press release and fact sheet:


At the end of last week, the North American Securities Administrators Association (NASAA) submitted another comment letter on Reg A+, which now (given the SEC open meeting notice) seems particularly well timed.  The NASAA letter highlights the proposed coordinated review process for Reg A+ offerings (see our prior posts on this).  NASAA notes that the coordinated review program could be adopted fairly quickly following the SEC’s actions on Reg A+.  Finally, NASAA takes the opportunity to reiterate once again its view that Reg A+ offerings should not be subject to state securities law preemption.   See the text of the letter at the NASAA website:

The SEC posted a notice that it will hold an open meeting on Wednesday, December 18, 2013 at 10:00 a.m to consider whether to propose rules and forms related to the offer and sale of securities pursuant to Section 3(b) of the Securities Act of 1933, as mandated by Title IV of the Jumpstart Our Business Startups Act.

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:

The SEC has made available the archived version of the webcast from the most recent meeting, held on May 1, 2013.  The meeting included presentations from Duncan Niederauer, Chief Executive Officer of NYSE Euronext, and William Hambrecht, CEO of WR Hambrecht + Co., as well as discussions with several Commissioners.  The webcast is accessible from here:

Niederauer discussed the decline in small company IPOs, as well as the IPO market generally, and the need for tick size changes.  Hambrecht reviewed with the Committee his views regarding the potential utility of the Section 3(b)(2) exemption (or Reg A+) for smaller companies, and how Reg A+ offerings might well serve to revive the IPO market for smaller companies that undertake a Reg A+ offering with a contemporaneous exchange listing.  Hambrecht urged the Committee to recommend that the Staff of the SEC move forward with rulemaking to implement the exemption and take into account in their rulemaking addressing the obstacles that render current Regulation A of limited use compared to Rule 506 under Regulation D.  Hambrecht also discussed his recommendations for additional reforms to the IPO process generally.  Bob Greifeld, CEO of NASDAQ, also supported changes to tick sizes, as well as the creation of a separate market for the securities of small companies.

The SEC Staff is expected to provide some guidance through more FAQs confirming that an EGC should be able to rely on certain of the disclosure, communications and confidential submission benefits in the context of an exchange offer or a merger.  Of course, it may be difficult to apply by analogy some of the JOBS Act Title I requirements to an exchange offer or merger scenario.  For example, the JOBS Act requires an EGC to file publicly at least 21 days prior to the commencement of a traditional roadshow.  It may not be intuitively obvious how to apply this principle in the context of a solicitation in an exchange offer, and we hope that the Staff can provide some useful guidance on this point.  We also note that even if EGCs are availing themselves of the JOBS Act provisions in the context of an exchange offer or a merger, they will still have to comply with all of the applicable rules for tender offers and proxy solicitations at the same time.

Many practitioners have found that the most challenging questions about EGC status arise in connection with previously public entities that have undergone some organic change on or prior to December 8, 2011, such as a merger or a going-private transaction.  There is no real guidance in the JOBS Act to answer some of these difficult questions, however in the SEC Staff’s FAQs on Title I of the JOBS Act, they indicated that if an issuer completes a transaction that results in the issuer becoming the successor to its predecessor’s Exchange Act registration and reporting obligations pursuant to Exchange Act Rules 12g-3 and 15d-5, and the predecessor was not eligible to be an EGC because its first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011, then the successor cannot now qualify as an EGC.  We understand that the SEC Staff intends to publish a new set of FAQs to further address successor issuer/EGC status questions in light of some of the issues that have come up to date.  In certain cases, it seems likely that the Staff guidance will provide some assurance that a reporting company that went dark or was taken private (such as through a private equity or management buyout) that would like to now access the public markets may qualify as an EGC. The same rationale would likely apply if a holding company parent or a subsidiary of the previously public entity now seeks to qualify as an EGC. . Further, a spin-off from an existing reporting company relying on the Staff’s position in Staff Legal Bulletin No. 4 also may qualify as an EGC, provided that the spun-off entity itself did not have and sale of common equity securities on or prior to December 8, 2011.  Of course, this guidance assumes that these transactions were undertaken for valid business purposes and not with any intent to circumvent the securities law, including EGC status as provided in the JOBS Act.

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.