March 26, 2015

SEC Adopts Reg A+

Yesterday, the SEC adopted rules and forms under Section 3(b) of the Securities Act – known as “Reg A+” – as required by Section 401 of the JOBS Act. The 453-page adopting release was posted last night (so no law firm memos have surfaced yet; when they do, we’ll post them in our “Regulation A/A+” Practice Area). Stinson Leonard Street’s Steve Quinlivan and Cooley’s Cydney Posner have blogs about it – as well as this blog from MoFo’s Anna Pinedo, Dave Lynn and Marty Dunn, an excerpt of which is below:

The SEC’s proposed rules already had provided a very practical format for private issuers seeking to raise capital. The proposing release generated mixed comments, with practitioners largely supporting the SEC’s proposal, and others raising concerns about the pre-emption of state securities review.

From today’s open meeting, and without having yet reviewed the final rules, it sounds like the SEC has taken an approach that seeks to promote capital formation, while preserving the disclosure requirements (both initial disclosure requirements and periodic reporting requirements for larger offerings) and other investor protection measures that were central to the proposing release.

The final rule establishes two tiers: Tier 1, for offerings that raise up to $20 million in proceeds in a 12-month period, including no more than $6 million of securities sold on behalf of selling securityholders, and a Tier 2, for offerings that raise up to $50 million in proceeds, including no more than $15 million of securities sold on behalf of selling securityholders. This will permit smaller and emerging companies to have an opportunity to raise substantial capital. The $50 million limit is, by statute, subject to periodic review by the SEC to determine whether the threshold is reasonable. The final rule also will include a limitation on the overall amount of securities that may be sold on behalf of selling securityholders. The exemption will not be available to certain bad actors and to other entities, such as investment companies.

The final rule, consistent with the proposed rule, modernizes the offering process by, for example, requiring that Regulation A+ offering statements be filed on EDGAR. The final rule incorporates a confidential submission process, similar to that available to EGCs relying on the JOBS Act, as well as the use of test-the-waters communications. Consistent with the proposed rule, a Tier 2 offering will be subject to rigorous disclosure standards, including a requirement to include audited financial statements, as well as to an investor limit. Issuers conducting Tier 2 offerings will also be subject to a requirement to file annual, semiannual and current event reports.

Most important to the success of Tier 2 offerings, Tier 2 offerings, given the detailed disclosure requirements and SEC review, will not be subject to state securities review. In addition, the final rule provides for a Tier 2 issuer to concurrently file a short-form Form 8-A to register a class of securities under Exchange Act Section 12(g) or 12(b)—this means that a Tier 2 issuer will, if it chooses to do so, be able to conduct a Regulation A+ offering and list on a national securities exchange.

B vs. Benefit Corp: Etsy Files as B Corp for Underwritten IPO

As noted in this Cooley blog and Entrepreneur article, Etsy has filed for an IPO led by first tier underwriters as a corporation certified by B Labs. See its Form S-1.

Note there is a difference between being a public benefit corporation and being a corporation certified by B Labs. B corps or B corporations are the terms used for companies certified by B Labs. Delaware public benefit corporations are referred to as “benefit corporations” as a shorthand, but not as B Corps.

The B Labs certification is not really all that significant – as it essentially puts Etsy in the same category as other socially aware companies (eg. Ben & Jerry’s). I found it more interesting that Etsy did not become a “public benefit corporation” under Delaware law, which truly would have been remarkable (and likely posed marketing challenges with investors).

Cybersecurity: How to Handle Questionnaires from Shareholders

As I scramble to pack for my spring break trip to Taiwan, I came across this interesting blog from McKenna Long’s Bill Ide & Crystal Clark about how companies should react to questionnaires being sent by some pension funds to companies about their board oversight of cybersecurity preparedness. Here’s an excerpt:

Certain pension funds have sent extensive, joint questionnaires to directors of public companies seeking detailed information as to the cybersecurity oversight systems and controls in place. Our view is that until the SEC provides further guidance, companies will generally find it in their interest to respond to such shareholder inquiries. Such disclosures, however, should be kept at a high level to demonstrate appropriate awareness and attention, while not disclosing specifics that could compromise the company’s cybersecurity strategy or raise issues under Regulation FD.

– Broc Romanek