By: Jim
Verdonik
Jim Verdonik
Founder of Innovate Capital Law
Contact me at:
(919)616-3225
Check out my newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=
Title IV of the JOBS Act directed the Securities and
Exchange Commission to issue a new regulation A with higher offering limits and
other provisions that make the new Regulation A more attractive to
issuers. The new Regulation A has been
nicknamed Regulation A+.
On March 25, 2015, the SEC issued final rules for
Regulation A+ in Release No. 33-9741.
Summary
of Primary Differences in Tier 1 and Tier 2 Regulation A+ Offerings
There are two types of Regulation A+ offerings: Tier 1 and Tier 2. If you want to do a Regulation A+ offering, should you choose Tier 1 or Tier 2?
- Tier 1
offerings allow you to raise up to a maximum of $20 million during any
rolling 12-month period from both accredited investors and non-accredited
investors with no maximum limit on the amount any individual investor can
purchase. Of that $20 million
maximum, up to $6 million can be re-sales by shareholders who are
affiliates of the issuer during any 12 month period. State registration laws are not pre-empted
for offers or for sales.
Issuers do not have any post-offering requirements to file periodic
reports with the SEC.
- Tier 2
offerings allow you to raise up to a maximum of $50 million during any
rolling 12-month period. Of that
$50 million maximum, re-sales by shareholders who are affiliates of the
issuer are limited to $15 million during
any 12-month period, except that for the first offering
and all offerings during the first year, the offering price for affiliate
re-sales cannot exceed 30% of the total offering price in the
offering. State registration laws are pre-empted for offers and for sales. Non-accredited investors
can invest in a Tier 2 offering, but only up to 10% of the greater of the
investor's net worth or annual income, unless the securities will be
registered on a national securities exchange. Self-certification by the investor is
permitted. The issuer can accept
the investor's representation about the amount the investor is allowed to
invest in the offering, unless the issuer knows the representation is
false. Tier 2 issuers are required
to file semi-annual reports with the SEC, until the issuer no longer has
300 record owners of shares. But
Tier 2 issuers who qualify as "smaller reporting companies" have
an exemption from full 1934 Exchange Act reporting requirements even if
they exceed Section 12 (g)'s registration triggers (2,000 record
shareholders or more than 500 non-accredited investors).
Differences
in Trading Markets for Tier 1 and Tier 2 of Regulation A+
Tier 2 rules facilitate trading on the
Over-the-Counter Bulletin Board by allowing brokers to satisfy Rule 15c2-11 by
relying on periodic reports Tier 2 issuers must file. Tier 2 rules also encourage Tier 2 issuers to
graduate to a national securities exchange by filing a Form 8-A, which is
easier to use than a Form 10.
Trading in the shares of Tier 1 issuers is likely to
be limited to trading on private platforms, because Tier 1 issuers are not
required to file periodic reports with the SEC. SecondMarket and SharePost are two
examples of platforms that facilitate re-sales of securities of private
companies. These private trading
platforms have focused on larger private companies. But many platforms that sell securities in
Regulation A+ offerings, Rule 506 (c) offerings and state crowdfunding
offerings will be able to facilitate secondary market trading on their platforms.
The SEC has also indicated that it is considering
permitting the creation of "venture exchanges" to facilitate
secondary market trading, including for Regulation A+ issuers. Such venture exchanges are likely to be
modeled on the London AIM Exchange and the Canadian TSX Venture Exchange. Future access to such venture exchanges could
become an advantage for Regulation A+ issuers.
Interaction
with Other SEC Re-Sale Provisions
Let's consider the rules that apply to re-sales of
shares by three types of shareholders:
- Investors
who repurchase shares in the Regulation A+ offering who are not affiliates
of the issuer before or after the purchase.
- Affiliates
of the issuer who own restricted securities or control securities.
- Non-affiliate shareholders who did not purchase their shares in the Regulation A+ offering.
Investors purchase unrestricted securities in both
Tier 1 offerings and Tier 2 offerings under Regulation A+. Therefore, unless the investor is an
affiliate of the issuer, the investors who purchase shares in the Regulation A+
offering can re-sell without complying with Rule 144. Affiliates must comply with Rule 144 or
another exemption when they re-sell even if they acquire unrestricted
securities, because shares held be affiliates become "control
securities."
Following both Tier 1 offerings and Tier 2 offerings
under Regulation A+, the issuer is a private company that does not file full
1934 Exchange Act periodic reports.
Consequently, the private issuer provisions of Rule 144 apply to re-sales
by shareholders who did not purchase shares in the offering.
Three things affect the ability of the issuer's
shareholders to re-sell under Rule 144:
- In Tier
2 officers, an issuer who files the annual and semi-annual periodic
reports required by Tier 2 of Regulation A+ can facilitate shareholders
re-selling shares by voluntarily filing two extra quarterly reports. See Page 186 of SEC Release No. 33-9741.
- Private companies (including Tier 1 and Tier 2
Regulation A+ issuers) can facilitate re-sales under Rule 144 by posting
on their websites the information referred to in Rule 15c2-11(a)(5)(i) to
(xiv) and (xvi).
- The public information requirements of Rule 144 (c) always apply to shares owned by affiliates of the issuer, but non-affiliates who have held their restricted securities for more than one year can re-sell shares can under Rule 144 without current public information of the issuer being available.
That describes the legal pathway for shareholders to
re-sell shares. Whether an actual market
develops for shares that shareholders want to resell depends on many
factors. However, as more investors
register with platforms to purchase shares in primary offerings by issuers, one
can expect the platforms will generate revenue by facilitating secondary market
trading by both buyers and sellers.
Therefore, both Tier 1 and Tier 2 of Regulation A+
offer the opportunity to create some liquidity for shareholders before sale of
the company or before becoming a full 1934 Exchange Act company.
Other articles about important Regulation A+ issues
include the following:
Summary of
Key Provisions of New Regulation A+
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Is Title III
Crowdfunding Already Obsolete? Regulation A+ = Supercharged Crowdfunding
|
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Your Goals
Will Determine Whether Regulation A+ Is Right for Your Business
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Why Choose? Why Not Do Both A Rule 506 Offering Followed
by a Regulation A+ Offering?
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Microcap Financings: Regulation A+
Offerings Join Public Shell Company Mergers and Self-Registrations to Create
Small Public Companies
|
|
State Securities Law Issues in
Regulation A+ Offerings
|
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