On December 19, 2018, the Securities and Exchange Commission (SEC) issued final rules that they will now allow public reporting companies to utilize Regulation A+ (Reg A+). Reg A+ creates a registration exemption for public offerings, based on two separate offering tiers. Tier 1 applies to offerings up to $20 million in a 12-month period, while Tier 2 applies to offerings up to $50 million in a 12-month period.
The extension of Reg A+ had been signed into law since May 24, 2018, as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act. However, the SEC did not adopt final rules allowing current public reporting companies to utilize Reg A+ until December.
The SEC created the Reg A+ exemption in 2015 as a registration exemption for public offerings, often making it easier for smaller companies to raise capital. Previously, companies that were subject to the SEC Securities Exchange Act reporting requirements were ineligible for the exemption. The new rules adopted by the SEC will allow a company’s Exchange Act reporting requirements to also count for the Reg A+ reporting requirements.
Reg A+ helps smaller and mid-sized companies to accelerate their growth, by allowing them to raise capital with less restrictions and reporting requirements. Simplified offering circular and SEC review procedures help smaller public companies obtain funding easier without having to enter into convertible debt or unfavorable dilutive financing arrangements. The SEC believes that the new amendments will provide reporting companies more flexibility to raise capital. Through the new amendments, companies should be able to more easily access capital markets, which should in turn benefit the entire market and help to grow market trading.
SEC reporting issuers may be interested in “testing the waters” as provided through Regulation A+ communication rules, while traditional registered offerings do not fully allow for such an option. For example, under registered offerings, emerging growth companies may test the waters to qualified institutional buyers and institutional investors but not to individuals. Regulation A+ permits testing the waters to all prospective investors including individuals without a requirement to file testing the waters materials.
Blue Sky compliance and state registration is preempted for all 50 states. However, additional reporting requirements exist for about 10 states. When compared to registered offerings, this provides tremendous cost savings and reduction in legal paperwork required by issuers.
Safe harbor exists for the integration of prior securities offerings including those registered under the Securities Act, providing flexibility to alternate between Regulation A and registered offerings which is particularly helpful for companies seeking to obtain funding from both institutional and non-accredited individual sources. Additionally, Regulation A requires issuers to maintain a lower number of shareholders of record, making it easier to deregister and suspend SEC reporting.
One disadvantage of Regulation A offerings for SEC reporting companies is that Regulation A does not permit at-the-market offerings, limiting the attractiveness for some investors. In addition, some attorneys may be less familiar with Regulation A+.
Equity Track provides capital raising solutions for Reg A+ offerings through its Cloudraise® funding software. Previously, only non-reporting companies were eligible to participate, but now all SEC reporting companies may conduct Reg A+ offerings using our funding software.