It’s been five years since the U.S. Securities and Exchange Commission adopted the final rules that expanded exempt offerings via Regulation A. So it’s worth reviewing changes that have occurred in the intervening years and the opportunities that still exist for companies looking to raise capital under the offering framework.
A Reduced Regulatory Burden
Commonly referred to as Regulation A+, the changes were intended to help smaller and midsized companies attract investment without forcing them to bear the cost of a full public offering. Smaller investors, too, have a greater opportunity to take advantage of investments in such securities.
Reg A offerings can be conducted pursuant to two “tiers”: Tier 1 is for offerings up to $20 million in a 12-month period; Tier 2 is currently for offerings of up to $50 million in a 12-month period. The present rules also relax some of the prohibitions on “testing the waters” communications that allow an issuer to determine if there’s a market for its securities. Non-accredited investors can take part in offerings up to certain limits. And Tier II issuers are given protection from many, though not all, state-level registration requirements.
Recent data shows Reg A offerings had been growing steadily, however, the impact (or lack thereof) of COVID-19 has yet to be determined. From 2015 through 2019, issuers reported raising about $2.4 billion in 382 qualified offerings, according to SEC figures, with $1.04 billion of that coming in 2019. The vast majority of the capital has been raised under Tier 2.
Changes Over the Years
In the years since it was first enacted, Congress and the SEC have attempted to improve Reg A.
When Regulation A+ took effect in 2015, its scope was largely limited to smaller, early-stage companies. At the time, any company subject to the reporting requirements of the Securities Exchange Act of 1934 (the ’34 Act) was ineligible for Reg A treatment.
In December 2018, the U.S. Securities and Exchange Commission said it would allow companies governed by the ’34 Act to have access to Regulation A. Specifically, if a Tier 2 issuer has complied with the reporting requirements of the ’34 Act under Section 13 or 15(d), then they will have satisfied the reporting requirements of Reg A.
Though growing, Reg A offerings still represent a relatively small percentage of the capital raised through exempt offering. (In 2019, $3 trillion was raised via non-exempt offerings.) To spur greater usage, companies and Reg A proponents have advocated for higher offering limits for Tier 2 and additional exemptions. In response, the SEC is currently considering a series of measures, including:
- Raising the Tier 2 cap from $50 million to $75 million per year.
- Increasing the 12-month cap on secondary offerings under Tier 2 from $15 million to $22 million.
- Simplifying existing bad actor provisions and allowing an accredited investor to provide proof its status in a written representation to an investor.
Expanding the Playing Field
Changes like those under consideration by the SEC should attract a larger pool of companies and more experienced investors to Reg A.
In 2019, the median initial public offering was $108 million, and for a number of companies, reaching an IPO of that size is difficult. Reg A allows companies a chance to access capital without the risks imposed by an IPO and the long-term compliance issues that come with being a public company, while raising amounts (especially if the Tier 2 limit is increased) within reasonable proximity to that median public offering amount.
For public companies, it’s a chance to raise faster and cheaper than a typical registered offering. Preparing an offering statement under Reg A for a follow-on, for example, is likely to cost significantly less than preparing a full registration statement. This is particularly true for ’34 Act companies that cannot take advantage of the streamlined securities registration forms. By the way, if a ’34 Act registered company elected to de-register, that issuer could still maintain reporting under Reg A (a much less onerous undertaking) to keep those securities qualified and continue to raise capital under Reg A.
Reg A offerings are exempt from liability under Section 17 of the ’34 Act. This, in turn, could help reduce the legal risks and, thus, costs of subsequent offerings for the Reg A issuer, ’34 Act registered or not.
Five years on, Reg A+ is still developing and still being discovered by companies. And with the SEC’s proposed changes in Tier 2 limits and exemptions, the next five years should see even greater growth in its use.
To learn more about the capital-raising opportunities presented by Reg A+, contact us for a consultation.