Hoping to revitalize Regulation A as a viable route for small companies to raise much-needed early capital, the SEC Wednesday adopted final rules transforming the regulation into a two-tier path with raised caps and some relief from the overlapping burden of state and federal oversight.
Unlike the proposed rules released in 2013, the final rules lift the current annual $5 million Reg A cap to $20 million for Tier 1 and limit offers by selling security-holders affiliated with the issuer to $6 million. The cap for Tier 2 is $50 million per 12-month period, as it was in the proposed rules, with a $15 million limit on offers by selling security-holders affiliated with the issuer.
Removing a large obstacle to Reg A offerings, the rules, which become effective 60 days after being published in the Federal Register, preempt state securities law registration and qualification requirements for Tier 2 offerings sold to "qualified purchasers." Companies traveling the Tier 2 path must submit audited financial statements, undergo SEC reviews and file ongoing semiannual and annual reports.
In an attempt to balance state and federal oversight, the new Regulation A+ rules call for Tier 1 offerings, which don't have the ongoing disclosure requirements, to remain subject to both federal and state review.
"Although still not as robust as required in a full registration, these new provisions increase the disclosures, transparency and protections of Regulation A," Commissioner Luis Aguilar said at Wednesday's meeting.
The rules aim to bring new life to the once-popular capital-formation path by implementing a provision of the 2012 Jumpstart our Business Startups (JOBS) Act. Almost as old as the SEC itself, Reg A had been a well-used way for small companies to raise capital without incurring burdensome reporting costs. In 1960, more than 1,000 companies filed Regulation A notifications, but by 2011, that number had dropped to 19 and only one of those was deemed qualified, Aguilar said.
"If the success of a regulatory exemption is measured by how often it is used, then Regulation A has been failing," he added.
Although Reg A continued to offer the middle course between private and public offerings, its low cap and the fact that companies had to comply with individual state "blue sky" reviews, which could delay an offering by an average of seven months, were two big reasons the path fell into disuse, according to a 2011 Government Accountability Office report.
While the JOBS Act addressed the offering cap, it preempted Reg A offerings from state law only if they were traded on a national exchange or offered or sold to a qualified purchaser. That could be a nonstarter for small companies, as most of them are not likely to be traded on national exchanges, given the high cost of doing so, the Equity Capital Formation Task Force told the SEC in the rulemaking process.
The group saw Reg A as a viable route for biotechs, which may have market caps of more than $250 million but can generate little revenue deep into their lives as public companies because of the expense and uncertainty of lengthy R&D.
"Providing these companies with more cost-efficient options for raising capital could mean the difference between whether or not a significant medical breakthrough ultimately reaches the hands of doctors and patients," the task force said.
Onemedmarket hailed the new Reg A+ as "an important first step in bringing back small IPOs [initial public offerings] which once represented 80% percent of all IPOs in the U.S.," as it would significantly decrease the costs of companies raising up to $50 million to prepare, file and maintain disclosure statements with the SEC. The rules should have a "huge positive impact on capital formation, and finally deliver on the promise" of the JOBS Act, Onemedmarket said.