| The JOBS Act was enacted in 2012 largely to encourage capital raising by smaller companies. Title IV of the JOBS Act, instructs the SEC to amend or adopt a new Regulation A under the Securities Act of 1933 so that offerings of up to $50 million are exempt from registration with the SEC, up from the current maximum in Regulation A of $5 million. |
The SEC issued proposed rules and forms on December 18, 2013 that would implement this directive by amending Regulation A to create two tiers of Reg A offerings:
· Tier 1: Up to $5 million in any 12-month period, including a maximum of $1.5 million in secondary sales, that are not exempt from "blue sky laws" or the securities law of US states.
· Tier 2: Up to $50 million in any 12-month period, including a maximum of $15 million in secondary sales, would be exempt from "blue sky laws" or the securities law of US states (so-called Regulation A+).
Despite additional disclosure requirements, including audited financial statements, and other obligations, most issuers would clearly prefer to explore the Regulation A+ route over the traditional Reg A exemption, given the higher maximum amount that can be raised under Regulation A+ and the exemption from blue sky laws.
However, the SEC has been unable to pass final rules on Regulation A+, due in large part to the sensitivity around exempting public sales of securities from state law regulation. In brief, under the proposed rules, Regulation A+ offers would be exempt from state securities laws (and review by state regulators) if they are either:
1. Sold only to “qualified purchasers”, or
2. Offered and sold on a national securities exchange.
Meeting the requirements of a national securities exchange nullifies any benefit of pursuing a Regulation A+ offering, so the real issue is whether issuers can realistically limit sales only to "qualified purchasers". Although the term was not specifically defined in this context, "qualified purchaser" could reasonably be expected to mean "sophisticated investor", which would put Regulation A+ offerings into a similar world as Regulation 506(c) deals. Fortunately for issuers, according to the proposed definition, a "qualified purchaser" is any purchaser of a securities issued to Regulation A+.
If that sounds circular to you, it's only because it is circular. To be exempt from state securities law requirements, Regulation A+ sales must be made only to "qualified purchasers" and all purchasers in Regulation A+ sales are "qualified purchasers". Ok. So why have any mention of the national securities exchange option?
This issue has caused consternation among a number of competing interests in and around Washington:
· Democrats that believe a primary goal of the SEC is to protect regular, unsophisticated investors, believe that definition "qualified purchaser" should include an element of sophistication. These Democrats point to a number of moments in the legislative history of the bill, a variety of similar definitions ("accredited investor" in Regulation D and "qualified purchaser" in the Investment Company Act of 1940), as well as a common sense understanding of the word "qualified".
· Republicans that believe a primary goal of the SEC is to facilitate the ability of companies, including small and medium sized companies, to raise capital in order to encourage economic growth, including job creation. According to this view, investors are sufficiently protected through the Regulation A+ process with the SEC and that requiring engagement with state securities regulators is too time consuming and expensive, and will ultimately make Regulation A+ as useless as Regulation A has historically been.
· State securities regulators, through the North American Securities Administrators Association (NASAA), don't have an interest in exempting a large class of securities from their regulation and believe that investors in their states are better served by state regulation of these deals. In order to address concerns in relation to the costly and time consuming nature of dealing with up to 50 state regulators, the NASAA has implemented new coordinated multi-state review program that appoints lead examiners to review Regulation A+ filings and that it believes will ease regulatory burdens for filers without sacrificing investor protection.
· The SEC itself seems split on the matter (http://www.crowdfundinsider.com/2014/11/56056-sec-proposed-regulation-commissioner-stein-succumbed-nasaa-koolaid/) .
So where does this lead us? With the way things work in Washington, most likely it just means further delay.
References
http://www.taylorenglish.com/blogs/emerging-markets/2014/09/26/congress-writes-letters-to-sec/
http://fortune.com/2014/12/11/sec-chair-no-drop-dead-date-for-equity-crowdfunding-rules/
Image credit to: Daniel Oines. http://bit.ly/1wyXuSo
· Tier 1: Up to $5 million in any 12-month period, including a maximum of $1.5 million in secondary sales, that are not exempt from "blue sky laws" or the securities law of US states.
· Tier 2: Up to $50 million in any 12-month period, including a maximum of $15 million in secondary sales, would be exempt from "blue sky laws" or the securities law of US states (so-called Regulation A+).
Despite additional disclosure requirements, including audited financial statements, and other obligations, most issuers would clearly prefer to explore the Regulation A+ route over the traditional Reg A exemption, given the higher maximum amount that can be raised under Regulation A+ and the exemption from blue sky laws.
However, the SEC has been unable to pass final rules on Regulation A+, due in large part to the sensitivity around exempting public sales of securities from state law regulation. In brief, under the proposed rules, Regulation A+ offers would be exempt from state securities laws (and review by state regulators) if they are either:
1. Sold only to “qualified purchasers”, or
2. Offered and sold on a national securities exchange.
Meeting the requirements of a national securities exchange nullifies any benefit of pursuing a Regulation A+ offering, so the real issue is whether issuers can realistically limit sales only to "qualified purchasers". Although the term was not specifically defined in this context, "qualified purchaser" could reasonably be expected to mean "sophisticated investor", which would put Regulation A+ offerings into a similar world as Regulation 506(c) deals. Fortunately for issuers, according to the proposed definition, a "qualified purchaser" is any purchaser of a securities issued to Regulation A+.
If that sounds circular to you, it's only because it is circular. To be exempt from state securities law requirements, Regulation A+ sales must be made only to "qualified purchasers" and all purchasers in Regulation A+ sales are "qualified purchasers". Ok. So why have any mention of the national securities exchange option?
This issue has caused consternation among a number of competing interests in and around Washington:
· Democrats that believe a primary goal of the SEC is to protect regular, unsophisticated investors, believe that definition "qualified purchaser" should include an element of sophistication. These Democrats point to a number of moments in the legislative history of the bill, a variety of similar definitions ("accredited investor" in Regulation D and "qualified purchaser" in the Investment Company Act of 1940), as well as a common sense understanding of the word "qualified".
· Republicans that believe a primary goal of the SEC is to facilitate the ability of companies, including small and medium sized companies, to raise capital in order to encourage economic growth, including job creation. According to this view, investors are sufficiently protected through the Regulation A+ process with the SEC and that requiring engagement with state securities regulators is too time consuming and expensive, and will ultimately make Regulation A+ as useless as Regulation A has historically been.
· State securities regulators, through the North American Securities Administrators Association (NASAA), don't have an interest in exempting a large class of securities from their regulation and believe that investors in their states are better served by state regulation of these deals. In order to address concerns in relation to the costly and time consuming nature of dealing with up to 50 state regulators, the NASAA has implemented new coordinated multi-state review program that appoints lead examiners to review Regulation A+ filings and that it believes will ease regulatory burdens for filers without sacrificing investor protection.
· The SEC itself seems split on the matter (http://www.crowdfundinsider.com/2014/11/56056-sec-proposed-regulation-commissioner-stein-succumbed-nasaa-koolaid/) .
So where does this lead us? With the way things work in Washington, most likely it just means further delay.
References
http://www.taylorenglish.com/blogs/emerging-markets/2014/09/26/congress-writes-letters-to-sec/
http://fortune.com/2014/12/11/sec-chair-no-drop-dead-date-for-equity-crowdfunding-rules/
Image credit to: Daniel Oines. http://bit.ly/1wyXuSo
| About the Author - Dan McNamee Dan is a U.S. trained and qualified lawyer (New York) with extensive experience in capital markets and M&A transactions in the United States, Europe, Asia and Africa. This background has provided extensive exposure to rules, regulations and regulators (including the SEC and FINRA) governing many forms of capital raising in the United States. With this foundation in the traditional capital markets space, Dan is seeking to help grow the crowdfunding market in the United States in a manner that encourages capital formation, protects investors and meets the extensive requirements of the nation's regulators. Born and raised in Cleveland, Ohio, Dan has worked and lived throughout the United States, in London and elsewhere in Europe. In his spare time, Dan has contributed a significant amount of pro bono work to a number of organizations, including the Clinton Health Access Initiative, and enjoys suffering as he watches Cleveland's consistently terrible sports teams lose. |
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