On December 19, 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to Rule 251 and Rule 257 of Regulation A under the Securities Act of 1933 (“Securities Act”). These amendments, which became effective on January 31, 2019, expand Regulation A to now include reporting companies under its umbrella of eligible users and permit an issuer’s Securities Exchange Act of 1934 (“Exchange Act”) periodic reports to satisfy Regulation A reporting obligations. Additionally, this new legislation creates conforming changes to Form 1-A as well.
Overview of Regulation A
Regulation A provides an exemption from the registration requirements of the Securities Act for offerings, in a 12-month period, of up to $20 million for Tier 1 offerings or up to $50 million for Tier 2 offerings. Issuers relying on Regulation A must first qualify by meeting certain eligibility requirements and ongoing reporting requirements, based on a two-tiered system tied to offering size. Tier 1 offerings are generally subject to blue sky registration and qualification requirements of all relevant states and are subject to minimal reporting requirements. Tier 2 offerings, on the other hand, are exempt from blue sky registration and qualification requirements, but are subject to ongoing periodic reporting requirements with the SEC. Tier 2 offerings only become subject to ongoing reporting obligations after their offering is complete.
Prior to these amendments, Regulation A was available to issuers organized and with their principal place of business in the U.S. or Canada. However, reporting companies, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act., were barred from using the Regulation A registration exemption.
Summary of the Newest Amendments
As mandated by Section 508 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, these amendments revised Regulation A in two significant ways. First, Rule 251 of Regulation A was amended to delete Rule 251(b)(2), which prohibited Exchange Act reporting companies from using the Regulation A exemption. This amended rule provides reporting companies with more options when it comes to raising capital by allowing them the opportunity to rely upon Regulation A. In light of this change, Item 2 of Part I of Form 1-A was updated to correctly reflect the new issuer eligibility criteria of using such form.
Furthermore, these amendments also added Rule 257(b), which, with respect to Tier 2 offerings, deems a reporting company issuer as having met the periodic and current reporting requirements of Rule 257 so long as the issuer meets the reporting requirements of the Exchange Act. To use this new rule, each issuer must have filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 12 months (or such shorter period that the registrant was required to file such reports) preceding each Form 1-K and Form 1-SA due date. Rule 257(d)(1), which previously provided for an automatic suspension of the duty to file reports under Rule 257 if and so long as the issuer is subject to the duty to file reports required by Section 13 or 15(d) of the Exchange Act, is also deleted under these amendments.
As a result of these amendments, an Exchange Act reporting company will be eligible to rely upon the Regulation A exemption from registration and, upon qualification of an offering statement for a Tier 2 offering, will become subject to Rule 257(b)’s reporting requirements. So long as the issuer is current in its Exchange Act reporting as of the due dates for periodic reports on Form 1-K and Form 1-SA required under Rule 257(b) (including, as applicable, the due dates for any special financial reports on such forms), its Rule 257 reporting obligation will be deemed to be met. However, if at the relevant Form 1-K or Form 1-SA due date the issuer is not current in its Exchange Act reporting, the issuer’s Rule 257 reporting obligation will not be deemed to be met, and at that time the issuer will be required to file Regulation A reports.
