SEC Approves Regulation A+, Creating “Mini IPOs” for U.S. and Canadian Companies
On March 25, the SEC adopted new rules that update and expand Regulation A, an existing exemption from SEC registration for small companies seeking to raise money in the public markets. The new rules, which are referred to as “Regulation A+,” create two tiers of securities offerings:
Tier 1, which consists of public 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 public 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.
Most importantly for companies, the new rules provide for the preemption of state Blue Sky laws in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, but for state qualification issuers may take advantage of a coordinated review program developed by the North American Securities Administrators Association (NASAA).
In addition, Regulation A+ securities purchased by non-affiliates are free trading from day one. So, an ongoing secondary market can develop for investors, leading to lower capital costs for issuers.
Both Tiers are subject to certain basic requirements as to issuer eligibility, disclosure, and other matters. Tier 2 offerings are subject to additional disclosure and ongoing reporting requirements, including: a requirement to file audited financial statements in the offering document, annual audited financial statements, and semiannual and current event reports. The new rules also place a limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10% of the greater of the investor’s annual income or net worth.
As to eligibility, the Regulation A+ exemption will be limited to companies based in the U.S. or Canada and to companies that are not currently SEC reporting. Blank-check companies, funds required to register under the Investment Company Act, companies that are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights, and those whose SEC registration has been revoked within the past five years or who are disqualified under the “bad actor” qualification rules are not eligible.
The new Regulation A+ rules will become effective on June 19, 2015. Meanwhile, you can read more about the final rules on the SEC’s website here.
What Regulation A+ Means for OTCQX, OTCQB and OTC Pink Companies
We are excited about the SEC’s new Regulation A+, especially the provisions for Tier 2 offerings that will make public offerings more efficient for small companies. For maybe the first time in history, the SEC has decoupled state Blue Sky preemption from an exchange listing allowing companies to do a widespread public offering if they file audited financials and provide ongoing reporting to the SEC. Non-accredited investors are allowed to participate in a federally-exempt offering, with thoughtfully designed provisions to limit their risk.
With these new rules, the SEC recognizes – like we do – that there is no one path to the public markets for small companies. Instead of forcing companies to do a traditional IPO to a stock exchange – a costly and stressful experience for small operators – they should have an incremental pathway to enter the public markets that depends on the stage of their business. Instead of a giant cliff, there should be a staircase.
At the same time, in the new rules the SEC wisely requires companies to provide more detailed information about their businesses and ongoing disclosure to federal regulators to be eligible for a public offering. Small company capital formation is never going to be risk-free, but you can ensure investors have the information available to understand the risks so markets can price them in accordingly.
When it comes to our OTCQX, OTCQB and OTC Pink marketplaces, we believe Tier 2 offerings will be an important source of new securities traded on our market. Meanwhile, Tier 1 offerings will be useful for companies located in capital-formation-friendly states.
For existing U.S. and Canadian companies traded on OTCQX, OTCQB and OTC Pink that are not SEC reporting and those that are considering deregistering from the SEC, Regulation A+ provides additional attractive options for raising money in national securities offerings.
Next Steps -- What We’re Doing
You’ll be excited to know OTC Markets Group is developing a “Reg A+ On-Ramp,” new rule requirements for companies that are interested in going public on our marketplaces following a Regulation A+ offering.
We will reveal more details in the coming months as we work with potential Regulation A+ companies and their advisors to create our marketplace rules. Meanwhile, if you have questions or are interested in being added to an e-mail distribution list to hear about Reg A+ related news and events at OTC Markets Group, please email our Corporate Services team at [email protected]