|Posted on April 8, 2018 at 9:45 PM|
Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2.
There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.
For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities. In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.
The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory. Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC.
With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing. Finally, the “bad actor” disqualification applies to both Rule 506 and Regulation A+ offerings. However, a company that had its registration revoked under Section 12(j) of the Exchange Act within five years before the filing of the offering statement or that has been delinquent in filing required reports under Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer is required to file such reports) is not eligible to do an offering under this Regulation.