Tuesday, May 12, 2015

State Securities Law Issues in Regulation A+ Offerings


By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out my newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=



The most controversial issues related to new Regulation A+ relate to state securities laws.

Issuers, their legal counsel and investment bankers wanted all Regulation A+ offerings to be exempt from state registration.

State securities administrators wanted all Regulation A+ offerings to be subject to state registration.

The SEC compromised by exempting Tier 2 Regulation A+ offerings from state registration laws, but the SEC did not extend the same protection to Tier 1 Regulation A+ offerings.

There are two likely results of this compromise:

·         Many issuers who raise less than $20 million (and so could choose to be governed by the Tier 1 rules) will choose to be governed by the Tier 2 rules.

·         Other issuers will continue to do Rule 506 offerings, which are except from state registration laws.

Let's explore why people are likely to make these choices.

Regulation A+ offerings involve conducting a general solicitation.  General solicitations (a/k/a public offerings) are regulated by both state and Federal securities laws. 

Compliance with Federal law doesn't always constitute compliance with state law.  Compliance with the laws of one state doesn't always mean you comply with the laws of all states.

How do state laws apply to Regulation A+ offerings?

  • Regulation A+ gives you an exemption from registration of the offering at the Federal level like in a Rule 506 offering or a Federal registered offering of securities by an issuer listed on a national securities exchange.
  • The Tier 2 of Regulation A+ pre-empts state registration laws. 
  • The Tier 2 pre-emption of state registration does not apply to state anti-fraud rules or to certain post-closing notices and filing fees many states require.
  • Tier 1 of Regulation A+ does not preempt state registration laws.
  • Regulation A+ does not preempt state broker-dealer, salesmen or investment adviser laws that may adversely impact issuers who use unregistered intermediaries.
  • More than one state law may apply.  Generally, the laws of the issuer's home state and every state where offers or sales are made applies to securities offerings.

Microcap Financings: Regulation A+ Offerings Join Public Shell Company Mergers and Self-Registrations to Create Small Public Companies

                                                                                                                                            
By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out


or my eLearning course at  http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

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+, because it permits you to raise more money with fewer restrictions than in old Regulation A.. 

On March 25, 2015, the SEC issued final rules for Regulation A+ in Release No. 33-9741.

In this article, we'll discuss how you can use Regulation A+ to become a microcap public company and the advantages  and disadvantages of using Regulation A+ compared to merging with a public shell company or doing a self-registration without an underwriter.

Legal Eligibility to Use Regulation A+

Let's briefly list the types of issuers who are legally allowed to conduct Regulation A+ offerings:

  • U. S. and Canadian companies;
  • That conduct an active business or that will use the proceeds of the offering to purchase an active business that is identified in the offering disclosure documents;
  • That are not yet public reporting companies or registered investment companies; and
  • That have not committed a list of securities violations specified in Regulation A+'s Bad Actor rules.
Now, let's talk about how Regulation A+ compares to two other types of transactions that sometimes attract similar types of businesses.

Regulation A+'s Sweet Spot

Regulation A+ offerings can help you achieve many of the same business objectives that in the past were the goals of companies that did mergers into public shell companies or did self-registrations without an underwriter.

This article compares the advantages and disadvantages of three types of transactions both to raise capital and to become publicly traded companies:

  • Regulation A+ Offerings.
  • Merging into a public shell company.
  • Self-registration without an underwriter. 
Either merging into a public shell or a self-registration can be combined with a Rule 506 offering or other exempt offering as a way to raise money and become public without doing a traditional IPO through a firm commitment underwritten registered public offering.  Often, shares are registered for re-sale by investors from a prior private placement offering.  Companies often make contractual commitments to investors in the earlier private offering to become public by registering their shares for re-sale or by merging into a public shell followed by a re-sale registration within a specified time period after the earlier private offering.

Desired Results

But most people care less about process than the results they achieve.  Let's examine three different pathways to achieving the following results:

·         Raise up to $50 million

·         Give investors in the offering the ability to re-sell shares to the public.

·         Create a trading market for all shareholders.

Table 1 below identifies the specific steps each pathway (Regulation A+, public shell mergers and self-registrations) requires to help businesses raise capital, give investors the legal ability to re-sell shares and create a public market. 

Although Table 1 below compares Tier 2 Regulation A+ Offerings to public shell mergers and self-registrations, we shouldn't assume that Tier 2 offerings are always a better choice than Tier I offerings.  Tier 1 Regulation A+ offerings can help you achieve many of the same things a Tier 2 offering does.  Or a Tier 1 offering may be a useful step toward later doing a Tier 2 offering. 

In another article, we discuss how Tier 1 ofRegulation A+ differs from Tier 2, the goals they can each help you achieve and how to choose between doing a Tier 1 offering or a Tier 2 offering.

Why Choose? Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?


 By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out


or my eLearning course at  http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

 
The SEC approved new Regulation A+, which the SEC approved New Regulation A+ on March 25, 2015 in SEC Release No.33-9741.

More than 1,000 Rule 506 offerings occurred each year for each offering that used the old Regulation A.

For several decades, SEC Rule 506 has been the most common way for small to mid-sized companies to raise capital.  In 2013 the SEC permitted businesses to make a general solicitation in offerings that comply with Rule 506 (c). 

So, the big question is:  Why should you do a Regulation A+ offering instead of a Rule 506 offering?

The short answer is that many more issuers will continue to choose to do Rule 506 offerings than Regulation A+ offerings.  That's because most issuers usually have simple goals:

·         Raise money.
·         Raise money quickly.
·         Raise money cheaply with low transaction costs.

If these short-term goals are your only concern, then Rule 506 will continue to be your best alternative. 

The other reason more businesses will use Regulation A+ is that most companies can't attract the large amount of capital that Regulation A+ allows you to raise.  It doesn't make sense to do a Regulation A+ offering is all you want or can raise is $1 million, because of transaction expenses.

Regulation A+ offers the following benefits to both businesses and their shareholders:

·         The legal ability to raise large amounts of capital.

·         Potentially higher valuations, because you can sell to both accredited investors and unaccredited investors and you are not selling "restricted securities."  Investors can legally re-sell unrestricted securities immediately, unless the investor is an affiliate of the issuer.

·         The ability of founders and other insiders to sell some of their shares in the offering

·         The ability to begin to develop a trading market for your shareholders to gain liquidity.

For businesses that want these benefits, doing a Regulation A+ offering vs. a Rule 506 offering probably requires paying higher transaction expenses and a slightly longer time to close the transaction. 

Comparing Rule 506 to both Tier 1 and Tier 2 of New Regulation A+
 
The two tables below compare key provisions of Rule 506 to both Tier 1 and Tier 2 of new Regulation A+ that create the advantages and disadvantages summarized above.

  • Table 1 below describes advantages and disadvantages during the offering process.
  • Table 2 below describes post-offering factors that could affect your decision whether to use Rule 506 or Regulation A+.
Table 1 below clearly shows that Rule 506 offers short term advantages over Regulation A+ with respect to both the timing and the expenses of the offering process. 

But Regulation A+ offers two primary advantages over Rule 506 during the offering process:
 
  • The ability to both offer and sell securities to unlimited numbers of both accredited investors and unaccredited investors
  • The ability of company founders and other insiders to re-sell some of their shares in the offering. 
Table 2 below shows that Regulation A+ also offers issuers who want to develop shareholder liquidity and a trading market that rue 506 dies not provide.

These Regulation A+ advantages are important, because the ability to sell to all types of investors and the investor liquidity advantages can help some businesses achieve higher valuations in Regulation A+ offerings than in Rule 506 offerings.

Why Choose?  Why Not Get the Best of Both Rule 506 and Regulation A+?

Like many things in life, you often face a choice between short-term and long-term needs.

But why should you have to choose?

Why can't you have your cake and eat it too?

If your business needs money quickly, why not:

  • Raise the money your business needs for the next six months by doing a small Rule 506 offering?
  • Then, use part of the Rule 506 offering proceeds to pay the expenses for a bigger Regulation A+ offering at a higher valuation.
Integration Issues

Regulation A+ allows you to combine two offerings as part of a single plan, because Regulation A+ provides that Regulation A+ offerings will not be integrated into any prior offerings.  That means you can start your Regulation A+ offering as soon as you close your Rule 506 offering.

Rule 506 doesn't offer the same flexibility.  Because of integration issues, you probably need to wait for six months after you complete a Rule 506 (b) offering before you can start making offers under a Rule 506 (c) offering, unless your Rule 506 (b) offering fully complies with Rule 506 (c) rules, including taking reasonable steps to verify that all your investors are accredited investors.

The added benefit of doing a small Rule 506 (b) offering and soon after doing a Regulation A+ offering is that most of the time and expenses you incur doing your Rule 506 offering will be for things you would have to do for the Regulation A+ offering.  You can re-use these things in your Regulation A+ offering.  So, your Regulation A+ offering will be faster and cheaper than if you had not done the earlier Rule 506 offering.

Under this two-step capital raising plan:

·         You get the money you need fast and at low transaction cost.
·         Your average valuation for shares sold in the two offerings will probably be higher than if you only did one big Rule 506 offering.
·         You can increase shareholder liquidity alternatives.
·         You can prepare yourself to become a publicly traded company by taking small steps in that direction.
 
Now, let's jump into the details that describe the advantages and disadvantages of Rule 506 and Regulation A+.


Which Should You Choose: Tier 1 or Tier 2 of Regulation A+?

                                                                                                                                            
By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out


or my eLearning course at  http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

 
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+
 
 
Is Title III Crowdfunding Already Obsolete? Regulation A+ = Supercharged Crowdfunding
 
 
Your Goals Will Determine Whether Regulation A+ Is Right for Your Business
 
 
Why Choose?  Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?
 
 
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
 



 
 
 
 

If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at JFV@WardandSmith.com or  you can check out my newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=