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.