The SEC has adopted new Regulation A Amendments which create lower cost opportunities for smaller businesses located in the U.S. and Canada to raise up to $50 million in debt and/or equity capital. What makes this new class of offering exciting is that it can be prepared for about the same cost as private offerings (under 4(a)(2) and Regulation D/506), and allows issuers to:
-- "test-the-waters" with all potential investors to see if there is sufficient demand before incurring further expense;
-- avoid the costs, complexities, and delays associated with State Blue Sky Laws when qualified as a "Tier 2" Offering;
-- advertise publically and sell to all potential investors, with non-accredited investors limited to 10% of the income or net worth;
-- increase demand for your offering because:
disclosure documents and financial statements must be reviewed and "qualified" by the Commission, and
share prices can be lowered to more elastic ranges that have higher demand and not over-concentrate purchaser investment portfolios;
-- reduce and avoid brokerage and exchange listing fees through direct offerings to the public;
-- retain greater control over the management of their business and commitments to their employees and customers;
-- list with the OTC when higher liquidity is desired by issuer and their shareholders;
-- convert to fully registered status at lower costs than registering the initial offering.
Mr. Ladd and this Firm played a leading role in passing Title IV of the JOBS Act and influencing the SEC's proposed and final Regulation A Amendments . He lead DC Bar Programs that brought the need for preemption from State registration and exemption from the "Section 12(g) Trigger" that impose higher SEC registration requirements to the attention of SEC Staff, and submitted comments to the SEC that were adopted and cited by the SEC in its final Regulation A Amendments. His comments and the SEC Release adopting the Regulation A Amendments can be viewed at www.SEC.gov, and the Release itself is reprinted at 80 Fed. Reg. 21806 (Apr. 20, 2016).
Mr. Ladd and this Firm later prepared the lead Amicus Brief filed on behalf of the National Small Business Association and its Members to oppose challenges brought to preemption filed by State regulators. The practical effect of these State challenges was to benefit brokers and private equity groups by increasing the costs and time to prepare and qualify Regulation A/Tier 2 Offerings at a national level; thereby compelling insures to use other private offering exemptions that benefit brokers and private equity groups. Fortunately, the Circuit Court of Appeals for the District of Columbia rejected the State challenges to preemption from State requirements in June 2016.
While Regulation A/Tier 2 Offerings now provide a lower cost alternative to businesses, and have attracted use by underwriters on behalf of issuers, there remain three areas that require Congressional and SEC attention for this class of offering to reach its fullest potential. First, preemption of Regulation A/Tier 2 Offerings must be extended to all secondary trading to increase market liquidity. This will remove illiquidity discounts taken from businesses on their initial offering, and increase the suitability of Regulation A/Tier 2 Securities to all investors. Second, provide clearer guidance to exempt internet Venture Capital Platforms from being declared an exchange or ATS. And, third, extend preemption to all primary and secondary trading of securities registered under the 34 Act, without regard to whether they have paid to be listed on a national exchange. When these actions are completed, we will have completed the "IPO On Ramp" that allows smaller businesses to make lower cost national, direct offerings on venture capital platforms, and later graduate to the OTC as a qualified Regulation A/Tier 2 or publically registered security.
Regulation A is divided into two "Tiers," each Tier has comparative advantages over Regulation D and other private offering exemptions that can lower or eliminate broker fees and investor premiums, and give founders greater control over term sheets. Tier 1 is available for offerings up to $20 million. It does not require audited financial statements, but does allow testing-the-waters and general solicitation of unrestricted securities to all investors. Tier 1 Offerings must be registered in each state shares are sold, and are best suited to regional offerings.
Tier 2 is available to all offerings up to $50 million, and requires more detailed disclosures, audited financial statements and continuing disclosures. Tier 2 must be used for offerings greater than $20 million, and is recommended when making a national or larger offering and as a lower cost bridge to full registration.
The primary advantages that Regulation A, Tier 2, has over Regulation D and other private exemptions include:
Comments Submitted to the SEC
Law Offices of Ford C. Ladd
Securities, Corporate, Commercial Litigation, and Tax
Regulation A Updates.
On May 22, 2015, Massachusetts and Montana filed Petitions with the United States Circuit Court of Appeals for the District of Columbia Circuit challenging the authority of the U.S. Securities and Exchange Commission to preempt Tier 2 offerings from state Blue Sky registration requirements. See Monica J. Lindeen, Montana State Auditor ex officio Montana Commissioner of Securities and Insurance v. U. S. Securities and Exchange Commission, D.C. Cir. No. 15-1149 (filed May 22, 2015), consolidated with William F. Galvin, Secretary of the Commonwealth of Massachusetts v.
U. S. Securities and Exchange Commission, D.C. Cir. No. 15-1150 (filed May 22, 2015).
This Firm has was retained by National Small Business United, known as the National Small Business Association, to file an Amicus Curiae Brief in support of the SEC's rulemaking authority.
On October 14, 2015, this firm filed an Amicus Curiae Brief and Addendum which demonstrates Congress knew that the JOBS Act authorized the SEC to preempt all Tier 2 Offerings from Sate Blue Sky registration requirements by reviewing the legislative history which included uncontroverted testimony from a leading national expert during Congressional Hearing that the text of the bill gave the SEC authority to preempt all sales before the JOBS Act was passed, and then demonstrated how striking preemption would frustrate the purpose of the JOBS Act by reviewing of the NASAA Coordinated Review Program disclosure requirements set forth in NASAA Statements of Policy which impose unreasonable costs that will force issuers to use other exemptions that provide less or no investor protection and have limited business and job growth.
Oral argument was held in April 2016, and, on June 14, 2016, the Court denied the State's challenges, and upheld preemption.
On November 17, 2016, Ford Ladd reintroduced a proposal to the SEC Small Business Forum asked the SEC to preempt all primary and secondary sales of Regulation A/Tier 2 and securities registered under the 34 Act from State registration requirements. This proposal was approved by the Forum, and will be make part of the Report to the SEC.
In addition, Ford Ladd introduced a second proposal, also approved by the forum, calling for the Commission to issue guidance that will allow internet venture capital platforms to flourish without being declared an exchange.