As the World Turns: Regulation A+
As 2013 closes and the Earth prepares for another rotation round the sun, it is fitting that the SEC should publish for comment proposed amendments to Regulation A to implement Section 401 of the Jumpstart Our Business Startups Act.
Like a new beginning the proposal begins well, creating two tiers of Regulation A offerings: Tier 1, which would consist of those offerings already covered by Regulation A (namely, securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders); and Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders. For offerings up to $5 million, the company could elect whether to proceed under either Tier 1 or 2. Under both tiers, companies would be subject to issuer eligibility requirements and the existing Regulation A disclosure requirements.
To promote innovation, the proposed rules would permit companies to submit draft offering statements for nonpublic SEC review prior to filing; permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement; and update the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including requiring electronic filing of offering materials.
Those investment freedoms are balanced by added investor protection measures for Tier 2 offerings. Tier 2 investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth; the issuer would be required to include audited financial statements in its offering circular; and the issuer would be required to file annual and semiannual ongoing reports and current event updates.
But here the proposal’s hopes to maintain an equal balance begin to wobble. Under current Regulation A, offerings are subject to registration and qualification requirements in the states where the offering is conducted unless a state-level exemption is available. Under the proposal, state securities law requirements would be preempted for Tier 2 offerings.
Before the earth completed one rotation around its axis, Massachusetts Secretary of the Commonwealth William F. Galvin, the chief securities regulator for that state, wrote the SEC. Mincing no words, Galvin lamented: “We are dismayed and shocked to see that the Commission’s Regulation A-Plus proposal includes provisions that preempt the ability of the states to require registration of these offerings and to review them. The states have tackled preemption battles on many fronts, but never before have we found ourselves battling our federal counterpart. Shame on the S.E.C. for this anti-investor proposal.”
A press release from the North American Securities Administrators Association followed shortly thereafter. NASAA president Andrea Seidt wrote: “The Commission’s proposed rule ignores Congress’ recent judgment and defies Congress’ clear intent. As a policy matter, it is not clear why the Commission would remove state oversight in a high-risk area where both federal and state resources should be fully leveraged to provide sufficient, regular review.”
Like a new year, the JOBS Act heralded a new beginning, bringing hope of economic revitalization, start-up growth, and a spirit of bipartisanship. Whether proposed Regulation A+ assists with the first two or withers like the last, remains to be seen.