As part of the JOBS Act, Congress directed the SEC to review the requirements related to Regulation A with an eye towards liberalizing the process and making it easier for emerging growth companies to raise capital.
Currently Regulation A is a provision in the Securities Act which permits companies, not already registered, to raise up to $5 million, without complying with the normal registration requirements of the Securities Act. The reduced requirements were designed to ease the capital raising process for smaller entities. Unfortunately, entities trying to raise capital under the Regulation A provisions still had to go through “blue sky” process in each state where they planned to solicit funds. This has proved to be a severe impediment to the use of Regulation A and consequently it is rarely used. Congress noted this when drafting the new provision in the JOBS Act.
In December 2013, the SEC issued proposed revisions to Regulation A in response to the legislative mandate, and this new Regulation A may prove to be a more attractive option for entities seeking to raise capital. The proposal creates two tiers of offerings. Tier 1 retains the $5 million annual limitation and much of the current rules. Tier 2 is the more interesting proposal.
The proposed Regulation A Tier 2 has the following features:
- Offering limit is $50 million in a 12 month period
- Insiders may sell up to $15 million in a 12 month period
- A new offering document, Form 1-A must be filed with the SEC and is subject to review and declared effective
- These offerings are exempt from state “blue sky” requirements
- No limits on types of investors, but an investor is limited in how much can be invested
- No restrictions on resale of the securities
- An issuer may test the waters with investors prior to submitting the offering document
- Audited financial statements are required for the offering document
- A Tier 2 issuer will be subject to ongoing reporting to its investors annually and semiannually. The annual communication must include audited financial statements.
The proposed rule was subject to a 60 day comment period, which has expired.
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