Congress Expands Availability of Regulation A
President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act). As part of this Act, Section 508, titled “Improving Access to Capital”, amends Regulation A under the Securities Act of 1933. Since Regulation A was adopted and the fund raising limits were increased to $50 million (i.e. Reg A+), it was always limited exclusively to non-reporting companies. “Non-reporting companies” included any companies not filing annual and quarterly reports with the US Securities and Exchange Commission (SEC) pursuant to the Securities Exchange Act of 1934 (the 1934 Act). Compliance with Reg A requires the filing of an “Offering Circular” with the SEC which then must review and approve the Offering Circular disclosures. However, once approved, the issuer could sell such securities publicly much like a full-blown registered offering. As a general rule, the disclosure requirements of a Reg A Offering Circular were less burdensome and the Reg A filing was processed somewhat faster by the SEC, than a full-blown registration statement. One particular aspect of a Reg A offering was, unlike a registered offering, after the Reg A offering was completed, the issuer did not have to become a “reporting company” under the 1934 Act. Rather, the issuer could remain a private, non-reporting company post-offering and only required to file limited disclosures with the SEC for a limited time after the offering was completed. Reg A also offered a few additional perquisites like the right to “test the waters” by making a preliminary solicitation of potential investors with an abbreviated disclosure notice to see if there was sufficient investor interest in the issuer’s securities to justify proceeding with a Reg A offering.
As part of the “Improving Access to Capital” section of the Act, Congress mandated that Reg A should be made available to reporting companies as well as non-reporting companies. Reporting companies would still need to file and have approved by the SEC an Offering Circular to be used in the actual offering. However, the post-offering filing requirements of Reg A would be satisfied by the reports already being filed by the reporting company under the 1934 Act.
While expanding the use of Reg A to reporting companies as well as non-reporting companies certainly provides an added tool for raising capital, its use might be somewhat limited. This is because companies trading on a national exchange (i.e. NYSE or Nasdaq) as well as companies traded over-the-counter (i.e. OTCQB) with market capitalizations in excess of $75 million and current in their 1934 Act filings, can use the short Form S-3 registration statement which is generally much quicker, cheaper and simpler than even a Reg A offering.
So, practically speaking, the reporting companies most likely to utilize a Reg A+ offering would be those over-the-counter companies with capitalizations of less than $75 million or reporting companies which missed a 1934 Act filing deadline during the past 12 months.
We will await the SEC’s regulatory action implementing this expansion hopefully in the near future.
Article by Roger D. Linn © Barnett & Linn