» New Regulation A and the JOBS Act
The JOBS Act is primarily known for opening the door to investment crowdfunding. It also had a provision to eliminate the ban on general solicitation, which the SEC is implementing under Rule 506c of Regulation D. Both of these changes will make it easier for the general public to become aware of investment opportunities and participate in private offerings. While crowdfunding will be available to everyone, Rule 506c is open to Accredited Investors only. What many do not realize is that the JOBS Act also included a provision relating to Regulation A of the Securities and Exchange Act of 1933. According to the JOBS Act the SEC is required to expand Regulation A to permit private offerings of up to $50 million without registration.
What is Regulation A?
Regulation A is not as well known as Regulation D but it does provide an exemption from registration with the SEC. Currently Reg A is set up as follows:
- Companies can raise up to $5 million within a 12 month period.
- An offering statement must be filed with the SEC on Form 1-A that includes the notification, offering circular, and exhibits.
- The SEC reviews the submissions for approval.
- “Bad Actors” are not allowed to participate. The will be standard practice as the SEC continues to amend regulations as part of the JOBS Act.
- Investors receive an offering circular which is very similar to a prospectus that is used in public offerings.
- The securities are NOT RESTRICTED. This is a big deal and a huge difference between the Reg D an Reg A exemptions. Securities sold through Reg D are restricted, which limits an investors option to sell them as they please.
- Advertising is allowed.
- Financial statements are simpler than the requirements for going public. They do not need to be audited.
- There are no Exchange Act reporting requirements.
- There are three different offering circular formats a company may use, including a simple Q&A format.
- Companies can “test the waters” before filing with the SEC.
This is actually a great option for companies. The “test the waters” provision allows companies to publish advertisements, including television and radio, along with showing information to potential investors prior to filing anything. This way if there is not enough interest a company can either revise their offering and try again, or simply forgo the process all together. This could be a viable option for companies that want to advertise but are still concerned about changing SEC regulation surrounding Rule 506c. It is important to remember, however, that the company cannot accept investment until a staff member of the SEC has reviewed and approved the documents. Testing the waters lets you gage interest and line up investors, you just can finish the process until the SEC is done.
When debating whether you should issue a private offering, go public, leverage crowdfunding, or do a hybrid with Regulation A – it is important to evaluate your overall strategies and goals. There are several options available to you. We provide information here and on our blog, http://www.privateplacementblogs.com/. Keep reading and stay up to date. We will bring you more legislative updates as they come.