31 Dec Regulation A+ Proposal: Highlights
Happy almost New Year everyone (except if you are in Sydney where it is already 2014)! I spent part of my holiday reading the 300+ page SEC proposal to overhaul Regulation A. My grade: Regulation A+ gets very close to an A+ on substance. If adopted mostly as proposed, this has the potential to literally transform the offering and reporting process for smaller companies (although I plan a comment letter to suggest some improvements!). In the next series of posts, I will summarize the key provisions in the proposal, which is still subject to comment and possible change. Here I will list the highlights briefly, then take them in a little more detail ahead. Of course not everything’s in here, you have to call me! Keep watching this space in 2014!!!
Here are the basics. Regulation A lets you do a simpler IPO with an “offering circular” approved by the SEC that has less disclosure than a typical S-1 registration, but you’re public and trading after. The challenge had been that you could only raise $5 million and the states individually reviewed the offerings, delaying them and causing significant cost and hassle.As mandated by the Jumpstart Our Business Startups (JOBS) Act, the Reg A offering limit was increased to $50 MM. The proposal sets up two tiers. Tier I is for offerings up to $5 million and Tier II is raising up to $50 million. Only US and Canadian based companies can use Reg A. Here are key provisions of the proposal:
Test the Waters. Issuers will continue to be able to “test the waters” and communicate with and solicit interest from any investors before and after filing the offering circular.
Confidential Filings. Filings under SEC review can remain confidential until 21 days before the offering is approved by the SEC.
Blue Sky Exemption. Tier II offerings will be exempt from blue sky state review.
Post-Offering Reporting. There will be ongoing semi-annual (ie 6 month), annual and current reporting obligations after a Tier II offering, but with more time to file and simpler filings than reporting companies.
Audited Financials. Tier II offerings and reports will have to include audited financials. This includes balance sheet for the last two years and other financials that are no more than nine months old.
Resale Possible. The current rule lets you go to $1.5 million of shares offered for resale in the Reg A offering. Now that’s the Tier I limit, for Tier II you can have up to $15 million worth of resale securities with no restriction on affiliate resales.
Bad Actor Disqualification. There is now a “bad actor” disqualification for all Reg A offerings basically the same as the new Reg D rules.
Investment Limitation. Any person or entity can invest, but you can’t invest more than 10% of the greater of income or net worth. This would be based on self-certification.
Disclosure Format. You can choose a disclosure format that lets you avoid things like conflict minerals disclosure, off-balance sheet arrangements, say on pay, dividend information, disagreements with accountants, corporate governance, complex dilution table and determination of offering price. Also executive compensation is simpler (and only covers one year), and you only have to disclose 10% owners (vs. 5% for S-1).
More to come….here’s to an awesome 2014 for all!!!
Bryan Glass
Posted at 19:24h, 31 DecemberHi David, like the post. I also think the tier II proposals are are a big improvement to the current but I was wondering if under this tier II the issuer has to have audited financials and maintain current filings (even if simpler) will it really be THAT much cheaper then an S-1? And I think the investor $ limits are a big restriction!
David Feldman
Posted at 11:40h, 02 JanuaryBryan, the disclosure will be a bit less than an S-1. More importantly, as compared to an S-1 to trade on the OTC you will have no state blue sky review, the ability to “test the waters” with investors in a much broader way (vs. limiting to QIBs and institutions) and ongoing reporting just every 6 months instead of quarterly.
Bryan Glass
Posted at 19:25h, 31 DecemberOh, and Happy New Year!!
David Feldman
Posted at 13:21h, 22 JanuarySame to you and all my blogees!!
Gene Massey
Posted at 13:07h, 22 JanuaryThanks for the information David. Please describe your take on the liquidity for the shares. Restricted shares? OTC? List on NASDAQ? Etc. Can you explain more detail on this: “for Tier II you can have up to $15 million worth of resale securities with no restriction on affiliate resales”
David Feldman
Posted at 13:20h, 22 JanuaryGene, the SEC has made clear that shares issued in a Regulation A offering are not restricted and freely tradeable. But unless you file Form 10 (though the final proposal may make this simpler) to become full reporting, you would stay trading over the counter. But even with Form 10 you are full reporting just 60 days after you file, then you can move to any market for which you qualify. As to the resale, anyone, including affiliates, would be able to use Regulation A under the proposal to publicly resell their stock with up to a $15 million value. Current Regulation A is limited to $1.5 million, so this was dramatically increased in the proposal.
David
Sam Singer
Posted at 02:39h, 26 JanuaryDavid,
What industries do you feel the new laws will be the most beneficial for?
When do you think the first issuers will start to hit the market?
David Feldman
Posted at 18:20h, 27 JanuaryInteresting questions Sam. If there ends up being a path to full reporting and a quick route to a national exchange it could be any company that would otherwise consider an IPO of up to $50 million regardless of industry. But many companies are content to trade in the over-the-counter markets either for a time or even permanently depending on their goals for going public. As to your second question, since the rules are not finalized yet, and may well still change before being completed, it will be at least a number of months before you can utilize new Regulation A+. But hopefully the first filings get done very soon after that! The hope is that this regulatory process is completed this year, hopefully earlier rather than later!
Sam Singer
Posted at 18:30h, 27 JanuaryThanks David.
I thought that the rules would be out after the comment period or shortly thereafter, is that not correct?
Off hand do you have a sense of what the Fees for a Reg A+ might run a company that is trying to raise 40-50M?
David Feldman
Posted at 12:01h, 30 JanuarySam, comments are due up to March 24. It was only just published in the Federal Register and comments can be submitted up to 60 days thereafter. Can’t tell about fees really until we see what the final rules will look like. But one would think fees would be less than a typical S-1 full registration, blue sky merit review and the like.