SEC Gives Small Companies a Big Break

A proposed change to Regulation A would exempt private offerings of up to $50 million from securities registration requirements.

The Securities and Exchange Commission on Wednesday released proposed rules for Regulation A+, an updated version of Regulation A. The change would allow private offerings to remain exempt from securities registration requirements if they raise less than $50 million in any 12-month period. Under the existing Regulation A, that threshold is $5 million. 

Securities and Exchange Commission logoThe proposal, mandated under Title IV of the JOBS Act, is intended to increase small companies’ access to capital. The proposal provides two options for exempt offerings: Tier 1, for those generating proceeds of up to $5 million in a 12-month period, and Tier 2 for deals up to $50 million.

Companies with Tier 2 offerings will be subject to more reporting requirements than Tier 1 issuers. Those requirements, which include additional disclosure (both at the time of issue and on an ongoing basis), annual reporting and “something equivalent to an 8-K obligation,” are “sort of the price of admission,” says Anna Pinedo, a partner at law firm Morrison Foerster.

“This is a change we were very much in favor of,” says Pinedo. “We’ve been advocating amending Reg A for a long time. Five million dollars is a very low offering threshold, and it hasn’t been updated in years and years.” The proposed rules take into account the findings of a Government Accountability Office study on Regulation A required by the JOBS Act. “I think these rules  go a long way toward addressing a lot of the concerns people had,” she says.

Securities sold under Regulation A+ rules would not be “restricted securities” subject to restrictions like the liquidity discount, Pinedo says. 

One problem the new rules don’t solve: Some issuers will want to do a Regulation A+ offering and later list their securities on a national exchange. To do that they have to file a Form 10 registration statement, which may be cumbersome and expensive. The SEC is specifically soliciting comments on whether small issuers should be able to use a simpler registration method, such as Form 8-A.

A 60-day comment period is under way, and the rules are expected to take effect in mid-2014.

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