Is Reg. A+  New Door to Raising Private Co. Capital?

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Is Reg. A+ New Door to Raising Private Co. Capital?

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By Lynn Watkins and Jon Jurva

Private companies seeking access to additional capital may find newly revised Regulation A (commonly referred to as “Regulation A+”) an attractive alternative to both a traditional registered public offering and a traditional private offering under Regulation D.

Under new rules promulgated through Regulation A+, smaller private companies may be able to access significant capital at earlier points in their growth cycles than is typically the case in an initial registered public offering and have access to more investors than they would under a traditional private offering, which is limited to accredited investors.

Regulation A+ (through amendments to existing Regulation A), was adopted by the Securities and Exchange Commission (SEC) on March 25, 2015 as part of the implementation of regulations under Section 401 of the Jumpstart Our Business Startups (JOBS) Act which gave the U.S. SEC broad powers to adopt rules that add a class of securities exempt from registration under the Securities Act for offerings up to $50,000,000. Regulation A+ became effective on June 19, 2015. Previously, Regulation A permitted unregistered public offerings of up to $5,000,000 of securities in any 12 month period by non-reporting U.S. and Canadian companies, including no more than $1.5 million in securities offered by securityholders of the issuer. The previous offering requirements also mandated filing of an offering statement to the SEC which must thereafter be qualified by the SEC. Historically, private issuers have shunned Regulation A in favor of Regulation D offerings due to Regulation A’s low maximum dollar cap of $5,000,000 and more stringent compliance requirements, including compliance with state securities law registration and qualification requirements and the review of offering materials by the SEC.

Through the Regulation A+ amendments, Regulation A has been expanded into two tiers:

  • Under Tier 1 offerings, an issuer may raise up to $20 million in any twelve month period and securityholders that are affiliates of the issuer may sell up to $6 million of securities in such offering.  There is no limit to the amount of securities that a particular investor can purchase.
  • Under Tier 2 offerings, an issuer may raise up to $50 million and existing securityholders that are affiliates of the issuer may sell up to $15 million of securities in such offering.  Tier 2 offerings are also not subject to state securities law registration and qualification requirements.

Common requirements of both Tier 1 offerings and Tier 2 offerings are:

  • an offering statement be filed electronically by the issuer with the SEC, comparable to an issuer filing a registration statement with the SEC in connection with a registered public offering (if an issuer has not previously sold securities under Regulation A+, it will be able to submit a draft offering statement for non-public review by the SEC);
  • notice of “qualification” from the SEC prior to sale of its securities under the offering;
  • ability to “test the waters” to gauge investors’ interest in a potential offering, either prior to, or after filing, an offering statement with the SEC, subject to SEC rules governing the filing of solicitation materials and disclaimers; and
  • a limitation that securityholders sell no more than 30% of a particular offering in the issuer’s initial Regulation A+ offering and subsequent Regulation A+ offerings occurring within 12 months thereafter.

In addition to the Tier 1 offering requirements, Tier 2 offerings must include:

  • audited financial statements;  
  • on-going annual, semiannual and current event reports; and
  • a limitation on the amount of securities that non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth unless such securities will be listed on a national securities exchange on their qualification.

Regulation A+ may not be used by: (i) SEC-reporting companies, (ii) development stage companies that have no specific business plan or purpose or that have indicated that their business plans are to merge with an unidentified company or companies, (iii) investment companies registered or required to be registered under the Investment Company Act, or (iv) companies issuing fractional undivided interests in oil or gas rights or a similar interest in other mineral rights.  Certain so-called “bad actors” are also prohibited from conducting a Regulation A+ offering.

If you would like to discuss how Regulation A+ and other capital raising strategies might fit into your company’s growth plans, please contact Jon Jurva at 312-258-5630 or jjurva@schiffhardin.com or Lynn Watkins at 312-258-5730 or lwatkins@schiffhardin.com.