[caption id="attachment_16258" align="alignnone" width="620"]
U.S. Securities and Exchange Commission building in Washington, D.C.[/caption] On May 24, the Economic Growth, Regulatory Relief, and Consumer Protection Act (act) was signed into law. In addition to rolling back a number of regulations applicable to financial institutions originating in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the act requires the U.S. Securities and Exchange Commission (SEC) to amend its rules to allow reporting companies to use Regulation A for securities offerings. Regulation A, or “Regulation A+” as it has been more commonly referred to since it was expanded in 2015, provides an exemption from the registration provisions of the Securities Act of 1933, as amended (Securities Act) for several types of offerings (both primary and secondary) of up to $20 million (Tier 1 Offerings) or $50 million (Tier 2 Offerings) in any one-year period, subject to compliance with certain requirements. See 17 CFR Sections 230.251 through 263. Currently, Regulation A is only available to issuers that are not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). However, the act orders the SEC to remove this eligibility requirement, so that Regulation A becomes available to reporting companies, and to change the rules under Regulation A to deem the ongoing reporting obligations associated with Tier 2 Offerings satisfied by continued Exchange Act reporting.
What This May Mean for Smaller Public Companies
While we will not know for certain until the SEC acts, there are five significant advantages that this expansion of Regulation A is expected to have for smaller companies that are already public. First, by conducting offerings in compliance with Tier 2 of Regulation A, which by law preempt state securities law requirements, reporting companies that do not trade on national securities exchanges (for example, those that trade in the over-the-counter markets) will be able to avoid the cost of compliance with such requirements, with which they otherwise would have to comply in public and private offerings. Second, while Form S-3 can often be used as an efficient short form of registration statement, some smaller public companies are either ineligible to use Form S-3 or are subject to the “baby shelf” volume limitation set forth in General Instruction I.B.6. of Form S-3 because they have a public float of less than $75 million. The volume limitation provides that such companies can only sell, during a 12-month period, securities having an aggregate market value of not more than one-third of the company’s public float. If the Form S-3 limits are too restrictive for their needs, these smaller public companies will be able to use Regulation A for offerings of up to $50 million of securities in any one-year period, which may be more efficient than using the lengthier Form S-1. Third, Regulation A allows issuers to do pre-filing investor outreach, or “test the waters” activities, including solicitations of written indications of interest, within some parameters. The opportunity to engage in such activities will enable smaller reporting companies to gauge investor interest in their securities by contacting potential investors before committing to the expense of preparing an offering circular. Fourth, Regulation A will allow smaller public companies to make offerings to retail investors (regardless of accredited status) through a general solicitation without having to comply with the burdensome income verification requirements of Rule 506(c) under Regulation D. Fifth, Regulation A offerings may serve as an alternative to private investment in public equity (PIPE) offerings. While in PIPEs an issuer sells securities under a private placement exemption, resulting in the securities being restricted for six months and therefore often at a discount to the prevailing public price and subject to registration rights, securities sold in a Regulation A offering are freely tradeable immediately and thus are often priced closer to the prevailing public price. However, one disadvantage for Regulation A offerings is that PIPEs can be done relatively quickly, with no SEC filing or review, while issuers conducting Regulation A offerings are required to file offering statements (which include, among other things, audited financial statements) with the SEC and to have the offering statements “qualified” by the SEC before sales may be made.