Regulation A; Exchange Act Section 12(g); State Law Pre-emption

Posted by on April 05, 2017

Regulation A; Exchange Act Section 12(g); State Law Pre-emption- Exchange Act Section 12(g) requires that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited, register with the SEC, generally on Form 10, and thereafter be subject to the reporting requirements of the Exchange Act.

Regulation A exempts securities in a Tier 2 offering from the Section 12(g) registration requirements if the company meets all of the following conditions:
• The company utilizes an SEC-registered transfer agent;
• The company remains subject to the Tier 2 reporting obligations;
• The company is current in its Tier 2 reporting obligations, including the filing of an annual and semiannual report; and
• The company has a public float of less than $75 million as of the last business day of its most recently completed semiannual period or, if no public float, had annual revenues of less than $50 million as of its most recently completed fiscal year-end.

Moreover, even if a Tier 2 issuer is not eligible for the Section 12(g) registration exemption, that issuer will have a two-year transition period prior to being required to register under the Exchange Act, as long as during that two-year period, the issuer continues to file all of its ongoing Regulation A+ reports in a timely manner with the SEC.

As I’ve touched on in this Lawcast series, Tier I offerings do not pre-empt state law and remain subject to state blue sky qualification. This process is expensive and time consuming. The NASAA offers a coordinated review program which can be helpful but a company still must comply with each state’s differing requirements and interpretations.

Tier 2 offerings are not subject to state law review or qualification – i.e., state law is pre-empted. State securities registration and exemption requirements are only pre-empted as to the Tier 2 offering and securities purchased pursuant to the qualified Tier 2 for 1-A offering circular. Subsequent resales of such securities are not pre-empted.

Also, pre-emption does not extend to broker dealer registration requirements. Five states do not have an issuer broker dealer exemption for public offerings such as a Regulation A. Those states are Florida, Texas, Arizona, New York and North Dakota. Also, Alabama and Nevada require that officers and directors that sell securities on behalf of a company, register as an agent.

Both Tier 1 and Tier 2 offerings remain subject to state antifraud provisions, and states may require certain notice filings. In addition, states maintain the authority to investigate and prosecute fraudulent securities transactions.