Update March 25, 2015: SEC Adopts Rules to update and expand Regulation A.
The A+ Offering and WR Hambrecht + Co
At WRH+Co, it has long been our conviction that growth companies can and should have access to public capital, enabling them to focus on innovation while providing an opportunity for all classes of investors to participate in their success. For that reason, we have been at the forefront of the development and implementation of Regulation A+. Our Founder, Bill Hambrecht, was a silicon valley pioneer who was instrumental in financing growth companies from Intel to Google during his time at Hambrecht & Quist and WRH+Co. Bill was influential in the structure and implementation of the JOBS Act, and his remarks and letters were cited over 40 times in the SEC’s release of the final rule. If you are interested in learning more about how the SEC’s Regulation A+ offering works for small businesses and investors, we would be happy to share our insights.
“Reg A+ is about creating jobs and new opportunities. And it’s about giving regular folks access to investments that only a handful of VC and private equity bigwig investors have enjoyed up until now.”
Steve Sadler, CEO of Allegiancy
“With the new Regulation A+, the SEC is creating an intermediate capital formation step on the road to going public. It’s a new kind of ‘IPO-Lite’ that could be hugely beneficial for companies and investors alike.”
Michael Raneri, CEO and Founder of Venovate
A New Regulatory Path for Growth Company IPOs
On December 18, 2013, the SEC released proposed rules to modernize Regulation A, a securities offering exemption that was originally designed to help small issuers access capital without subjecting them to the costs and burdens of full SEC registration and oversight. As one of the key job formation initiatives contained in the bipartisan 2012 JOBS Act, Title IV mandated that the SEC fix the antiquated Regulation A exemption. On March 25, 2015, the SEC finalized rules (often referred to as Reg A+ Tier 1 or Tier 2) allowing companies to raise up to $50 million in public offerings. We believe this new regulatory path has the potential to disrupt the financing landscape and to help connect innovative companies with the investment capital they need to grow.
“At its core, the mandate of Regulation A+ is to help increase the access of smaller companies to capital. This is obviously a very important objective. Our rulemaking goal is to make Regulation A+ an effective, workable path to raising capital that – very importantly – also builds in the necessary investor protections.”
SEC Chair Mary Jo White, Dec. 18 2013
Regulation A: Background
Until recently, the Regulation A exemption under the Securities Act of 1933 permitted an unregistered offering of up to $5 million in securities in any 12-month period by U.S. and Canadian companies. According to a 2012 GAO report,1 the “SEC has previously stated that the primary purpose in adopting Regulation A was to provide a simple and relatively inexpensive procedure for small business use in raising limited amounts of needed capital.” Regulation A issuers submit a paper-based offering statement to the SEC; this offering statement is essentially an abbreviated version of an IPO prospectus and it must be “qualified,” or cleared, by the SEC and delivered to prospective purchasers.
In addition to SEC review, Regulation A offerings have traditionally been subject to review under state securities laws (also known as “Blue Sky” laws). In comparison, a traditional registered IPO listed on a national exchange is exempt from Blue Sky requirements. Securities sold in a Regulation A offering are freely transferable in the secondary market, though Regulation A issuers are not subject to Exchange Act reporting requirements. Regulation A offerings have become increasingly rare in recent years, especially in comparison to other financing alternatives such as registered offerings (e.g. IPOs) or private placements (Regulation D exemptions).
According to the SEC, between 2009 and 2012, there were only 19 qualified Regulation A offerings raising a total of $73 million in proceeds, while “[d]uring the same period, there were approximately 27,500 offerings of up to $5 million (i.e., at or below the cap on Regulation A offering size), for a total offering amount of approximately $25 billion, claiming a Regulation D exemption, and 373 offerings of up to $5 million, for a total offering amount of approximately $840 million, conducted on a registered basis.”2 Market observers have attributed the decline of Regulation A offerings to the outdated $5 million proceeds cap (particularly in relation to offering costs) as well as the complexity of state securities law compliance, among other factors.
The recently adopted rule by the SEC is nothing short of a game-changer.
“Congress, by allowing general solicitation and advertising in the capital formation process, opens broad possibilities for entrepreneurs and new and seamless investment opportunities for the public.”
Scott Andersen, General Counsel for FundAmerica
The 2012 JOBS Act: Lawmakers Outlined “Regulation A+”
Title IV of the 2012 JOBS Act directed the SEC to expand Regulation A to exempt offerings of up to $50 million in equity, debt or convertible securities. The law mandated that issuers relying on this new exemption would be required to file audited financial statements with the SEC on an annual basis. Additionally, the JOBS Act stated that securities issued under the expanded A+ framework would be exempt from Blue Sky registration and qualification if they are sold on a national securities exchange, or sold to “qualified purchasers.” However, without infrastructure currently in place for A+ securities to trade on national exchanges, lawmakers left it within the purview of the SEC to settle the state jurisdiction question by establishing the definition for “qualified purchaser” in the rulemaking process.
The New SEC Rule: Commonly Referred to as A+ Offerings
The SEC’s final rule was adopted on March 25, 2015, and becomes effective summer of 2015. In the rule, the SEC expanded Regulation A into two tiers: Tier 1 for offerings of up to $20 million and Tier 2 for offerings up to $50 million. By removing key procedural obstacles and introducing common-sense investor protections, this new Regulation A+ framework creates a viable capital-raising alternative for issuers that want to remain independent and innovative. Below are some of the key provisions included in the SEC’s A+ rule:3
- Proceeds: For Tier 2 offerings, there is an annual offering limit of up to $50 million in equity, debt or convertible securities, including no more than $15 million from selling security holders. For Tier 1 offerings, the annual limit is $20 million, with not more than $6 million from selling security holders.
- Testing the waters: Issuers may solicit interest in a potential offering with the general public, either before or after the filing of the offering statement, so long as any solicitation materials are preceded or accompanied by a preliminary offering circular.
- Blue Sky: Offerings made under Tier 2 are generally exempt from state securities law registration and qualification requirements. And while Tier 1 offerings would still be subject to state Blue Sky regulations, the states’ new Coordinated Review process has dramatically reduced the burdens associated with this process.
- Offering Circular: Issuers can confidentially file statements for SEC qualification. Offering circular must include audited financial statements and balance sheets for the two most recently completed fiscal year ends. The Offering Circular format is narrative disclosure, similar to what is required from smaller reporting companies in a prospectus, but more limited in certain respects.
- Ongoing Reporting: Issuers that conduct a Tier 2 offering must electronically file annual and semiannual reports with the SEC, but those who conduct Tier 1 offerings generally have no ongoing reporting obligations.
- Transferability | Liquidity for Investors: Securities sold in these offerings are not “restricted securities” under the Securities Act, and thus are freely tradable in the secondary market (unlike private issues).
We are excited that the final A+ rule will enable growth companies to begin issuing A+ securities in 2015. WR Hambrecht + Co is on the forefront of helping companies raise funds through this new innovative solution.
NASAA offers streamlined solution through Multi-state Coordinated Review
In March 2014, the North American Securities Administrators Association approved a coordinated review process for Regulation A (and A+) offerings with the intention of balancing the regulatory burden on filers with the need for effective protections for investors. Currently, 48 US states and territories have agreed to participate in the coordinated review process. State securities administrators are advocating for this simplified review process as an alternative to the “qualified purchaser” Blue Sky exemption suggested in the SEC’s December 2013 rule making proposal for Regulation A+ offerings. This process seems to be working well, and one issuer that has already completed the NASAA coordinated review program has publicly come out strongly in favor of the process.