At an open meeting yesterday, the SEC voted to propose the exempt public offering rules mandated by Title IV of the JOBS Act. The proposals have been much-anticipated, because the possibility of offering up to $50 million of securities within a 12-month period without going through the full-blown registration process has been seen as a promising way to revive the smaller IPO market. Over the past decade, the infrastructure for conducting IPOs by companies raising less than $50 million has all but disappeared, and existing exemptions like Regulation A have proven to be a poor alternative given the $5 million offering limit and the lack of state preemption.
The SEC’s proposal seeks to create a workable exempt public offering regime that will hopefully not fall into disuse like current Regulation A. The SEC proposes to amend Regulation A to create two tiers of offerings: Tier 1, for offerings of up to $5 million in a twelve-month period, and Tier 2, for offerings of up to $50 million in a twelve-month period. Both of these tiers would be subject to basic requirements concerning issuer eligibility, disclosure, and other matters, building on the current provisions of Regulation A while in some cases modernizing existing provisions to make Regulation A consistent with current practice for registered offerings. Tier 2 offerings would be subject to additional requirements, such as the provision of audited financial statements, ongoing reporting obligations, and certain limitations on sales, reflecting the directives in Title IV of the JOBS Act and the additional investor protection concerns associated with larger exempt public offerings.
The offering documents used in Regulation A as proposed to be amended would be filed with the SEC and subject to a review and qualification process, as has been the case with current Regulation A.
Ongoing Reporting Obligations Proposed
One aspect of the proposed Regulation A amendments that will no doubt draw a lot of interest from commenters is the ongoing reporting scheme that issuers using Regulation A will become subject to when they conduct a Regulation A offering. The SEC has proposed to:
1. require issuers that conduct a Tier 1 offering to electronically file a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of a qualified Regulation A offering to provide information about sales in such offering and to update certain issuer information;
2. require issuers that conduct a Tier 2 offering to electronically file with the Commission annual and semiannual reports, as well as current event updates, similar to the way an issuer is required to file periodic and current reports when it conducts a registered offering and becomes subject to Exchange Act reporting requirements pursuant to Section 15(d);
3. require issuers that conduct a Tier 2 offering to, where applicable, provide special financial reports to provide information to investors in between the time the financial statements are included in Form 1-A and the issuer’s first periodic report due after qualification of the offering statement;
4. require issuers that conduct a Tier 2 offering to include in their first annual report after termination or completion of a qualified Regulation A offering, or in their Form 1-Z exit report, information about sales in the terminated or completed offering and to update certain issuer information; and
5. eliminate the requirement that issuers file a Form 2-A with the SEC to report sales and the termination of sales made under Regulation A every six months after qualification and within 30 calendar days after the termination, completion, or final sale of securities in the offering.
The Big Deal: Federal Preemption is Proposed for Regulation A Offerings!
One of the biggest concerns with the implementation of Title IV of Regulation A has been whether the SEC would address the state blue sky issues that have historically made Regulation A less attractive as an offering alternative. In a surprise move, the SEC has proposed to provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” which is defined to be all offerees of securities in a Regulation A offering and all purchasers in a Tier 2 offering. The SEC said that these federal preemption provisions are appropriate in light of the total package of investor protections proposed to be included in the implementing rules for Regulation A.
– Dave Lynn