Title IV of the JOBS Act – Small Capital Formation – is quickly being called the new Regulation A+. Title IV of the JOBS Act technically amends Section 3(b) of the Securities Act of 1933, which up to now has been a general provision allowing the Securities and Exchange Commission (SEC) to fashion exemptions from registration, up to a total offering amount of $5,000,000. The new provision will be Section 3(b)(2) with the old statutory language remaining and being relabeled as Section 3(b)(1).
Technically speaking Regulation D, Rule 504 and 505 offerings and Regulation A offerings are promulgated under Section 3(b) and Rule 506 is promulgated under Section 4(2). This is important because federal law does not pre-empt state law for Section 3(b) offerings but it does so for Section 4(2) offerings. The cost of compliance with the various and varied state laws can be prohibitive with an offering limit of $5,000,000. Moreover, although Regulation A is technically an exemption from registration, it actually requires the filing of a registration statement with the SEC (Form 1-A) and such registration statement must clear comments. Accordingly, over the years, Rule 506 has become the private offering exemption of choice and Rule 505 and Regulation A are rarely used.
The New Regulation A+
The JOBS Act amended Section 3(b) to add Section 3(b)(2) which requires the SEC to adopt a new exemption as follows:
(A) The aggregate offering amount of all securities offered and sold within the prior 12-month period in reliance on the exemption shall not exceed $50,000,000;
(B) The securities may be offered and sold publicly;
(C) The securities shall not be restricted;
(D) The civil liability provisions in Section 12(a)(2) shall apply to any person offering or selling the securities;
(E) The Issuer may solicit interest in the offering prior to filing any offering statement in accordance with rules to be written by the SEC;
(F) The SEC shall require the Issuer to file annual financial statements with the SEC;
(G) A suggestion that the SEC require the Issuer to prepare and file an offering document and prospectus with the SEC and that the SEC enact disqualifying bad boy provisions (Regulation A already has such provisions).
The new regulation is limited to equity, debt and convertible debt securities. Moreover, the new rule allows the SEC to make Regulation A+ issues file periodic reports analogous to current 10Q and 10K reports by Issuers subject to the reporting requirements of the Exchange Act of 1934. Currently Regulation A Issuers are not required to report.
Finally, and what could be the real meat, is that securities sold under the new Regulation A+ are “covered securities”. That is the new Regulation A+ preempts state law.
So is this really a new exemption?
So Issuers under the Regulation A+ will file a registration statement, be preempted from abiding by individual state registration laws, issue free trading shares and thereafter report to the SEC. Other than the test the waters provision, I’m wondering how this new Regulation A+ exemption will be different to my client base of small cap and smaller public companies, than a straight direct public offering (DPO) using Form S-1.
Perhaps the new registration form will be simplified, but smaller companies are already allowed to use simplified disclosures on a Form S-1 (such as two years of audits instead of three and omitting certain financial summaries….). Perhaps the reporting requirements will be simplified, but again, small businesses are already allowed simplified disclosures and the SEC is big on homogenizing forms and reports and for good reason, investors can’t follow the disclosures otherwise, and the point of disclosure is to protect the investing public.
Unlike the crowdfunding or Emerging Growth Company provisions of the JOBS Act, Title IV has only evoked 8 comment letters from the public and other than one from the North American Securities Administration Association (NASAA) they lack any substance whatsoever and the NASAA letter addresses all sections of the JOBS Act not just Regulation A+. Perhaps it is because the entities that are interested in small public offerings (up to $50,000,000) don’t differentiate the new Title IV from existing rules and regulations and the bigger companies simply don’t care.
It is N/A to them.
Until the SEC publishes and enacts this new Regulation A+ we won’t know if it really is a new opportunity or if it will go the same way as the current Regulation A; which isn’t very far.
The Author
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.
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