What Grade Would You Give Regulation A+?

By Yousef Bahou. On March 25, 2015, the Securities and Exchange Commission adopted final rules that will enable smaller companies the opportunity to generate additional capital.  Often referred to as Regulation A+, these new rules are an updated and expanded version of Regulation A, and provide companies a workable path to raising additional capital without sacrificing protection of the investor.

Regulation A, a longstanding exemption, allowed unregistered public companies to sell up to $5 million worth of securities during a 12-month period with no more than $1.5 million going to security holders of the company.  As the usage of this exemption has become relatively rare, the JOBS Act (Jumpstart Our Business Startups) pushed to amend the rules in support of larger capital raising by smaller companies.

The updated exemption, mandated by Title IV of the JOBS Act, provides for two tiers of offerings without having to comply with the SEC’s general registration requirements:

  • Tier 1 allows for up to $20 million worth of offerings in a 12-month period with not more than $6 million in offers being sold to affiliates of the issuer.
  • Tier 2 allows for up to $50 million worth of offerings in a 12-month period with not more than $15 million in offers being sold to affiliates of the issuer.

In addition to the limitations set forth in the original Regulation A exemption, a company must not resell more than 30% of a particular offering and subsequent offerings for the first 12 months after the initial offering.  However, the rules would also permit companies to submit draft offering statements for non-public review by Commission staff before filing, allow the continued use of solicitation materials after filing the offering statement and require the electronic filing of offering materials.

To participate in the larger and more stringent, Tier 2 offering, the company must also provide audited financial statements, file annual, semiannual and current event reports, and limit the amount of securities non-accredited investors can purchase.  The Commission is currently working with state regulators and representatives from NASAA and the SEC to find an efficient method of implementing these rules.

Keep in mind this exemption would be limited to companies that are organized in and have their principal place of business within the United State or Canada.  Despite the increase in requirements to participate, the goal of the Regulation A+ is clear: provide companies with more opportunity for liquidity, without burdening them with the weight of traditional and challenging filing requirements. Hopefully, this will continue to mean more opportunity for growth as our economy continues to move forward.

Yousef Bahou is a Senior Consultant for Armanino’s Equity Management Solutions practice, eliminating the headaches of equity accounting and administration for dozens of privately-held and pre-IPO companies.  Armanino takes a uniquely interdisciplinary approach to equity management.  Our experienced Equity Management Solutions team includes CPAs, valuation experts and software specialists, who can seamlessly handle every part of your equity program.

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