Regulation A+: The New Mini-Public Offering

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Martha Parker
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1 BOSTON // HARTFORD // NEW YORK // NEWARK // STAMFORD // PHILADELPHIA // WASHINGTON, DC // WILMINGTON Regulation A+: The New Mini-Public Offering Jonathan Guest, Esq. McCarter & English, LLP May 7, 2014

2 Title IV of JOBS Act Codified at Section 3(b)(2) of the Securities Act Old Regulation A: Limited to $5 million annually results in freely tradable securities (not restricted ) Offering Statement subject to SEC and state review and approval Issuer does not become SEC reporting company Decreased use: expense and transaction risk too high relative to cap 2

3 SEC issued proposed Rules and related forms on December 18, Comment period ended March 24, Highlights of Regulation A+ Modernized to meet current public offering techniques Greatly increased annual cap State regulatory pre-emption Enablement of after-market liquidity 3

4 Create two tiers: Tier 1 up to $5 million annually; Tier 2 up to $50 million annually Eligible Issuers: U.S. and Canadian companies with a principal place of business in U.S. or Canada and not subject to SEC reporting Ineligible: certain development stage companies; investment companies; issuers of fractional oil or gas rights; others Broaden to foreign private issuers generally? Eligible Securities: equity (including preferred stock), debt, convertible debt, options, warrants 4

5 Offering by Selling Securityholders (enables primary and secondary offerings) Tier 1 up to $1.5 million Tier 2 up to $15 million Investment Limitations No more than greater of 10% of annual income or net worth for Tier 2 investors Does this work for institutional investors? Exception for accredited investors? 5

6 Integration of Offerings No integration with prior offers or sales Or subsequent sales that are registered, or made more than 6 months after Reg. A, in reliance on Rule 701, Regulation S or pursuant to an employee benefit plan, Entry into Exchange Act Reporting No exemption from Section 12(g) threshold Must monitor recordholders and, if required, must file Form 10 6

7 Securities Law Liability Section 12(a)(2) for offers and sales made by means of offering circular or oral statements with material misstatement. As an exempt offering, Section 11 doesn t apply. General federal and state antifraud rules apply. 7

8 Offering Disclosure: Form 1-A Offering statement. Either current Reg. A Model B, or Form S-1, Part I Scaled disclosure: risks, business, management, MD&A, beneficial ownership, proceeds etc. Part I (notification), Part II (offering circular), Part 3 (exhibits) Filed via EDGAR and qualified following comment process. Non-public submission available Tier 1 2 years financials, audited if available; auditor independence but not PCAOB Tier 2 2 years audited financials; audit in accordance with PCAOB standards 8

9 Continuous or Delayed Offerings Notably: Selling security holders Shares underlying options and warrants Shares underlying convertible securities Securities offered within 2 years of qualification date 9

10 Offering Communications Can publicly test the waters prior to filing including via a document (with disclaimers) Pre-filing prospects not limited to accrediteds Offers may be made after filing offering statement No sales without use of offering statement File solicitation material 10

11 Ongoing Reporting Form 1-Z for Tier 1 completion report Tier 2: Form 1-K annual report, 1-SA semi-annual report, 1-U current report Scaled disclosure on Forms 1-K and 1-SA relative to 10-K and 10-Q Form 1-U fewer reporting triggers than 8-K Post-market Trading Tier 2 reports meet Rule 15c2-11 information for broker/dealers No change to securities exchange requirements Form 10 11

State Securities Law Requirements Unlikely Reg A issuers will meet exchange listing standards resulting in covered securities the pre-emption problem Tier 1 offering documents subject to state review

12 State Securities Law Requirements Unlikely Reg A issuers will meet exchange listing standards resulting in covered securities the pre-emption problem Tier 1 offering documents subject to state review NASAA working on coordinated review Tier 2 sales to qualified purchasers are exempt Term includes all offerees in Tier 1, all purchasers in Tier 2 FINRA Regulation A is public offering under FINRA rules FINRA will review underwriter compensation, and information and documents 12

Structuring Your Regulation A+ Offering

Structuring Your Regulation A+ Offering April 14, 2015, 1:00PM 2:00PM EST Speakers: Marty Dunn, Morrison & Foerster LLP Anna T. Pinedo, Morrison & Foerster LLP 1. Presentation 2. Client Alert Regulation