Our Venture Capital & Emerging Companies practice group analyzed the SEC’s recently released equity crowdfunding rules (referred to by the SEC as “Regulation Crowdfunding”) in a concise and easy-to-digest article authored by Sam Effron and Kristin Gerber.

The article does a great job of highlighting some of the regulation’s shortcomings, such as the limits it places on amounts that can be raised (at both the company and investor level); the requirement that companies complete and file a new Form C; and certain ongoing reporting obligations for companies.  In all, the added costs, burdens, and risks associated with complying with this regulation means that in most cases there are better alternatives (such as raises under Rule 506) for start-up companies looking to access the capital markets.

Mintz Levin Partner Pam Greene was interviewed on Friday by Law360 regarding the advent of Regulation A+ and its anticipated impact on capital-raising by smaller companies. Pam noted that Tier 2 offerings can be likened to a “mini IPO” because they let companies raise capital under less onerous requirements than a full-fledged public company faces. “This will be an easier path for smaller companies to go public that is less expensive than an IPO,” Greene said.

Read more here.

The SEC has also posted links to the new forms to be used in connection with Regulation A+ offerings and post-offering reporting:

Form 1-A: Regulation A Offering Statement

Form 1-K: Annual Reports and Special Financial Reports

Form 1-SA: Semiannual Report or Special Financial Report Pursuant to Regulation A

Form 1-U: Current Report Pursuant to Regulation A

Form 1-Z: Exit Report Under Regulation A

Form 8-A: Registration of Certain Classes of Securities Pursuant to Section 12(b) or (g)

 

Despite the attempt by the State of Montana’s securities division to stay the rule, Regulation A+ is effective as of today, June 19, 2015.

Regulation A+ allows companies organized in the U.S. and Canada to raise money from investors, even those that are not accredited investors, under a less burdensome regime than traditional going public transactions and through the use of general solicitation, even to unaccredited investors, which is not allowed under current private placement rules.  Regulation A+ replaces and expands the seldom used Regulation A by increasing the offering limit under the rule from $5 million to up to $20 million for “Tier 1 Offerings” and up to $50 million for “Tier 2 Offerings.” The regulation also preempts state law review for Tier 2 Offerings, for which the disclosure documents will instead be reviewed by the SEC.

While Regulation A+ has critics on both sides of the table – that it doesn’t go far enough in providing flexibility, or that it goes too far and does not adequately protect unsophisticated investors – it should be a welcome avenue for smaller companies who believe their companies have significant value to test the appetite of investors, raise capital publicly at a lower cost, and become accustomed to the public disclosure regime by preparing less burdensome ongoing disclosure. It remains to be seen how companies take advantage of these new rules and whether investors are at the ready.

Securities Matters readers are invited to join Kristin Gerber and me at the Cambridge Innovation Center this Thursday, April 16, starting at 4:30, for an update on the status of equity crowdfunding rules at both the federal and state levels. Given that it has been 18 months (and counting) since the SEC first proposed rules to implement the JOBS Act’s directive to make crowdfunding a reality, we will take a look not just at the SEC’s rulemaking but also the increasing activity at the state level (including crowdfunding rules passed in January 2015 right here in Massachusetts). We’ll also discuss other means of capital-raising for the small, scrappy start-up that may have greater practical, near-term application. The program is free to attend, so we hope to see you there.

 

The Securities and Exchange Commission adopted yesterday a new set of regulations entitled Regulation “A+,” designed to provide a more streamlined approach for small and mid-sized companies to offer securities to the public. These rules will become final 60 days after publication by the SEC in the Federal Register. We will be preparing a detailed client advisory analyzing these new rules for our friends and clients.

Regulation A+ was initially proposed by the SEC in December 2013 as an amendment to little-used current Regulation A.  The purpose of this new rule is to implement Section 401 of the Jumpstart Our Business Startups Act (the JOBS Act) which directed the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act of 1933, as amended. Regulation A+ as adopted yesterday provides for 2 tiers of offerings with differing requirements.  Tier 1 is for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2 is for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements, such as filing an offering circular with the SEC which will be reviewed by the SEC before qualifying the offering, audited financial statements, and annual reports. Additionally, the amount of securities a non-accredited investor may purchase in an offering will be capped when buying securities not listed on a national exchange.

These rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements; however, companies may take advantage of the coordinated review program recently developed by the North American Securities Administrators Association (NASAA), the association of state regulators, that is expected to reduce the compliance costs for small businesses seeking to receive state approval for these offerings.

However, as with many of the rules recently proposed or adopted by the SEC, this one is not free from criticism, as NASAA yesterday released the following statement:

“We appreciate that all five Commissioners recognize the efforts of state securities regulators and NASAA to successfully implement a modernized and streamlined Coordinated Review program for Regulation A offerings to help small and emerging businesses raise investment capital. The program has been lauded for effectively streamlining the state review process that promotes efficiency by providing centralized filing, unified comments, and a definitive timeline for review.

However, it appears that the SEC has adopted a rule that fails to fully recognize the significant benefits of this program to issuers and investors alike. We continue to have concerns that the rule does not maintain the important investor protection role of state securities regulators and must look more closely at the final rule as we evaluate our options.”

The SEC hopes that Regulation A+ will fare better than the current Regulation A and become a more practical way for smaller issuers to access the public markets. Only time will tell if these new offering requirements will lead to easier access to capital.

The SEC recently proposed rule amendments as part of its implementation of Title V and Title VI of the JOBS Act.  These proposed amendments reflect the increased registration, termination of registration and suspension of reporting thresholds provided by the JOBS Act.  The substance of these amendments are summarized below.

  • Amendments to rules adopted under Section 12(g) of the Securities Exchange Act of 1934.  Under revised Exchange Act Section 12(g), as amended by the JOBS Act:
    • an issuer that is not a bank or bank holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are “held of record” by either 2,000 persons or 500 persons who are not accredited investors;
    • an issuer that is a bank or bank holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are “held of record” by 2,000 persons; and
    • an issuer that is a bank or bank holding company may terminate its registration of a class of securities if that class is held of record by less than 1,200 persons, while the threshold for termination of registration and suspension of reporting for other issuers remains at 300.

The SEC proposed changes to Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3, which govern registration, termination of registration and suspension of reporting obligations, in order to conform to the new JOBS Act thresholds. The proposed revision to Rule 12g-1 would conform the rule to the asset and holder of record thresholds established by the JOBS Act; the proposed revisions to Rules 12g-2 and 12g-3 would conform the rules to the holders of record thresholds established by the JOBS Act; and the proposed revisions to Rules 12g-4 and 12h-3 would conform the rules to the suspension of reporting obligations thresholds established by the JOBS Act.

Continue Reading SEC Proposes Changes to Exchange Act Rules to Implement Title V and Title VI of the JOBS Act