Reg A+: Only a Partial Win for Small Business Capital Access

Tuesday, the SEC approved final rules for so-called Reg A+, a new and revitalized version of the Regulation A exemption, created by the JOBS Act of 2012.  While the new rules remove barriers for issuers seeking a raise near the top of the $50 million cap, they fail to remove the greatest barrier – state registration – for the smaller issuers, effectively leaving them out in the cold. 

Reg A has been essentially unusable for years.  The exemption allows a company to sell securities to the public without full registration, provided the issuer raises no more than $5 million and provided the offering complies with all applicable state securities (“blue sky”) laws.  Because of the low $5 million cap and, more importantly, the heavy burden of complying with at least two regulatory regimes – federal and one or more states – this exemption has become almost entirely obsolete.  Hoping to make a new, workable version, Title IV of the JOBS Act directs the SEC to create an additional class of securities under the exemption.  In addition to raising the cap to at least $50 million, Title IV left the door open for state preemption.

Surprising no one, the state regulators objected.  Although Reg A had languished for years even as small business clamored for better capital access, the North American Securities Administrators Association (NASAA), a group representing state regulators, only very recently announced it had “solved” the Reg A problem.  NASAA’s solution is a program of coordinated review whereby participating states agree to use uniform review standards and a streamlined filing process.  While this process may be a little less cumbersome, it still requires that the issuer complete two separate filings, under two separate regulatory regimes.  For the small companies likely to use Reg A, that is an expensive undertaking.  Moreover, NASAA has insisted that state-level review is important for investor protection, but it’s unclear what additional protection the state regulators provide.  NASAA President William Beatty has argued that small, local offerings require local regulators.  But, as Mr. Beatty himself has said, Reg A offerings that involve local issuers typically involve local investors who are familiar with the issuer.  Also, to the extent there is a benefit from review by a local regulator, that benefit would seem to be lost under coordinated review.  It’s also unclear how any one state regulator is “local” to a company doing a multi-state offering.

In the end, the SEC split the baby.  Reg A+, the Commission announced, will have a two-tier structure.  Offerings under Tier 1 may raise up to $20 million and will be subject to blue sky laws.  Offerings under Tier 2 may raise up to $50 million and will not be subject to blue sky laws.  Tier 2 offerings will have additional requirements not applicable to Tier 1 offerings, however, such as a cap on the amount a non-accredited investor may invest (10% of income or assets), periodic filing requirements (annual, semi-annual, and current event), and the obligation to file audited financials.  Given the expense and demands of blue sky compliance, it’s unlikely many issuers will use Tier 1.  That means that companies seeking less than $20 million will either choose a Tier 2 raise or, more likely, find that the new Reg A+ is as unusuable as the old one.  

Spring Regulation Issue: Oil, Obamacare and Tech Innovation

This week, Cato released the Spring issue of Regulation.

The cover article, by economist Pierre Lemieux, argues that the recent oil price decline is at least partly the result of increased supply from the extraction of shale oil.  The increased supply allows the economy to produce more goods. This benefits some people, if not all of them.  Thus, contrary to some commentary in the press, cheaper oil prices cannot harm the economy as a whole.

A related article examines the dramatic increase in crude oil transported by trains and whether additional safety regulation of tank car design should be enacted.  Economist Feler Bose argues that companies have an incentive to reduce accidents to reduce insurance rates.  Thus less-obvious ways to prevent accidents, like better track maintenance, may be more cost-effective and undertaken voluntarily to reduce insurance costs.

The issue has three articles on health policy.  Cal State Northridge professor Shirley Svorny describes how state medical licensure boards do very little to discipline doctors who cause medical errors.  Instead, medical quality is created by the private decisions of individual hospitals to grant privileges to doctors to treat patients and the decisions of specialty boards, such as those that govern cardiology, to certify members as qualified.  A second article concludes that the regulation of electronic cigarettes is likely, even though the evidence for adverse health effects is thin, because a powerful coalition of existing cigarette companies and anti-smoking activists would benefit. A third article examines questionable legal maneuvering by states to implement aspects of the Affordable Care Act (Obamacare).

Finally, two articles describe the regulation of emerging technologies. The first, by Oxford’s Pythagoras Petratos, examines nanotechnology and argues that both the Food and Drug Administration and the Environmental Protection Agency are ill-suited to regulate this complex technology. This bureaucratic burden could slow nanotech innovation in the United States. The second article, by Henry Miller of the Hoover Institution, describes the regulation of so-called “biosimilar” drugs.  Biosimilars are “generic” versions of patented biologic drugs, which are produced by living cells through genetic engineering rather than the chemical reactions used to produce traditional patented and generic prescription drugs.  He concludes that clinical trials will be necessary to prove biosimilarity and thus “biosimilar” drugs will not be cheap like traditional generic drugs.

Young v. UPS : Bias Plaintiffs Win at the Supreme Court

As I’ve had occasion to note in this space, pundits regularly complain that the current Supreme Court is somehow throttling job-bias lawsuits out of some concern for employers’ rights. However, the Court’s recent rulings on employment discrimination law in fact tend toward the cautious and centrist, and the caseload of discrimination claims filed with the Equal Employment Opportunity Commission (EEOC) remains near its all-time highs. (Thus the New York Times complained in 2013 that a Court decision four years previously had made it hopeless to file age-bias claims, omitting to mention that lawyers filed more such cases after the decision than before.)

Today’s decision in Young v. United Parcel Service, on the scope of pregnancy discrimination and accommodation law, will be hailed reflexively in some quarters on a which-side-are-you-on basis, since the pregnant employee won. Few non-lawyers are likely to stick around for its dry details, in which Justice Stephen Breyer laid out a balancing test mushy enough in its liberalism to win over Chief Justice Roberts and even Justice Alito. (Readers interested in such matters as McDonnell-Douglas burden-shifting and the selection of similarly situated co-worker “comparators” should follow up at the specialty employment-law blogs.) The practical impact of the case is also somewhat limited by Congress’s having further liberalized pregnancy accommodation law in plaintiffs’ favor after the events being sued over. 

Will the TPP Strengthen U.S. Foreign Relations?

The Obama administration wants us to believe that even while the Trans-Pacific Partnership is shaping the global economy in favor of U.S. interests, it is also furthering U.S. foreign policy by strengthening alliances and containing China’s influence in the Asia-Pacific region. 

Alan Beattie of the Financial Times has written a scathing rebuttal to this line of argument:

This is an appealing fall-back for those who don’t like the deal’s content, but is at best one of the weaker arguments in favour. Whether or not agreements help strategic alliances, the intrusive and one-sided nature of pacts negotiated with the US can arouse resentment as well as cooperation.

The participation of countries in the TPP has less to do with enthusiasm for importing the US economic model than a grudging acceptance that yet more tribute has to be paid in order to retain access to the US market. Negotiating a trade deal with the US is not a particularly pleasant business, and nor is it becoming happier over time. You are essentially presented with a US model agreement that contains a decreasing proportion of actual free trade and an increasing proportion of intellectual property protection, and invited to sign.

It’s not clear that a country’s affection for the US will increase after being required to rewrite its patent and copyright law every few years on a model dictated by, respectively, the Pharmaceutical Research and Manufacturers of America and the Recording Industry Association of America. The US itself does not offer much liberalisation. It is highly unlikely to substantially dismantle its agricultural subsidy and protection regime to allow Australian and New Zealand farmers abundant access to its dairy market or stop its rice subsidies disadvantaging Vietnamese rice exports in world markets. America’s trading partners are thus on a permanent treadmill of enforced policy change in order to keep their trade access to the US.

Congress’s Archaic Information Practices

There have been more than 2,700 bills introduced so far in the current Congress. That’s more than 30 bills per day, every day this year, weekends included. Ordinary Americans have a hard time keeping up, of course. Congress does, too.

The controversy around the anti-sex-trafficking bill in the Senate last week illustrates this well. Debate around the formerly non-controversial bill fell into disarray when Democrats discovered language in the bill that would apply the Hyde Amendment to fines collected and disbursed by the government. (The Hyde Amendment bars government spending on abortion. Democrats argue that it has only applied in the past to appropriated funds, not disbursement of fines.)

How is it that it took until late March for Democrats to discover controversial language in a bill that was introduced in January?

Well, Congress is awash in archaic practices. For one, bills are written in “cut and bite” style—change this line, change that word, change another—rather than in a form that lays out what the law would look like if the bill were passed. That makes bills unreadable—a situation Rep. Justin Amash (R-MI) has sought to remedy.

Score a Victory for Cruz over Brown in Most Recent Climate Change Scuffle

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

On Sunday, in anticipation of Sen. Ted Cruz’s (R-TX) announcement that he intends to run for president, California governor Jerry Brown (D), declared to NBC’s Meet the Press Cruz was “absolutely unfit to be running for office.” Why? Because of Cruz’s stance on climate change—some of which Cruz laid out on late night TV last week.

But comparing Cruz’s comments on Late Night with Seth Meyers and Brown’s remarks on Meet the Press, it is pretty clear that it is Gov. Brown who needs to spend more time familiarizing himself with the scientific literature on climate change and especially its associations with extreme weather events.

Apparently Gov. Brown is convinced that climate change, or rather the apparently scarier-sounding “climate disruption” Brown prefers, is behind the ongoing drought in California, not to mention the East Coast’s cold and snowy winter.

Cruz, on the other hand, told a more restrained story—that data doesn’t support many alarmist claims and that satellites show no warming during the past 17 years while climate models expected warming—one which comports better with the science that he portrayed.

While there is certainly more to the story than Cruz went into in his brief appearance with Seth Meyers, he is right, that according to satellite observations of the earth’s lower atmosphere as compiled by researchers at Remote Sensing Systems, there has been no overall temperature increase during the past 17 years.

Make the U.S.-Iran Nuclear Deal: Failure Is Not an Option

Iran has been one of Washington’s chief antagonists for nearly four decades. But a deal to keep Tehran from building nuclear weapons is in sight.

Tehran, though an ugly regime, does not threaten America. The United States is the globe’s greatest military power with the most sophisticated nuclear arsenal and finest conventional force.

Tehran’s leaders are malign actors, but nevertheless have reason to feel insecure. In 1953 Washington helped overthrow the democratically elected prime minister. Presidents George W. Bush and Barack Obama regularly declared military action to be “on the table.”

Israel is concerned over a possible Iranian nuclear weapon, but when asked in 2011 whether Iran would drop a nuke on Israel, former Defense Minister Ehud Barak responded “Not on us and not on any other neighbor.” Israeli Defense Force’s Lt.-Gen. Benny Gantz observed: “I think the Iranian leadership is comprised of very rational people.” Who recognize Israel’s overwhelming retaliatory capacity.

Washington’s ally the Shah started the Iranian program. Tehran’s motive, noted former Mossad head and national security adviser Efraim Halevy, “is not the confrontation with Israel, but the desire to restore to Iran the greatness of which it was long deprived.”