On November 2, 2020, the SEC adopted final rule changes to harmonize, simplify and improve the exempt offering framework. The new rules go into effect on March 14, 2021. The 388-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. As such, like the proposed rules, I am breaking it down over a series of blogs with this fourth blog discussing the changes to Regulation A. The first blog in the series discussed the new integration rules (see HERE). The second blog in the series covered offering communications (see HERE). The third blog focuses on amendments to Rule 504, Rule 506(b) and 506(c) of Regulation D (see HERE.
Background; Current Exemption Framework
The Securities Act of 1933 (“Securities Act”) requires that every offer and sale of securities either be registered with the SEC or exempt from registration. Offering exemptions are found in Sections 3 and 4 of the Securities Act. Section 3 exempts certain classes of securities (for example, government-backed securities or short-term notes) and certain transactions (for example, Section 3(a)(9) exchanges of one security for another). Section 3(b) allows the SEC to exempt certain smaller offerings and is the statutory basis for Rule 504 and Regulation A. Section 4 contains all transactional exemptions including Section 4(a)(2), which is the statutory basis for Regulation D and its Rules 506(b) and 506(c). The requirements to rely on exemptions vary from the type of company making the offering (private or public, U.S. or not, investment companies…), the offering amount, manner of offering (solicitation allowable or not), bad actor rules, type of investor (accredited) and amount and type of disclosure required. In general, the greater the ability to sell to non-accredited investors, the more offering requirements are imposed.
For a chart on the exemption framework incorporating the new rules, see Part 1 in this blog series HERE.
The current two-tier Regulation A offering process went into effect on June 19, 2015, as part of the JOBS Act. Since its inception there has been one rule modification opening up the offering to SEC reporting companies (see HERE) and multiple SEC guidance publications including through C&DI on the Regulation A process. For a recent summary of Regulation A, see HERE. In reviewing the rules, the SEC found a few areas where compliance with Regulation A is more complex or difficult than for registered offerings, including the rules regarding the redaction of confidential information in material contracts, making draft offering statements public on EDGAR, incorporation by reference, and the abandonment of a post-qualification amendment. The new rules address these points.
The SEC has simplified the requirements for Regulation A and established greater consistency between Regulation A and registered offerings by permitting Regulation A issuers to: (i) file certain redacted exhibits using the process previously adopted for registered offerings (see HERE); (ii) make draft offering statements and related correspondence available to the public via EDGAR to comply with the requirements of Securities Act Rule 252(d), rather than requiring them to be filed as exhibits to qualified offering statements (see HERE); (iii) incorporate financial statement information by reference to other documents filed on EDGAR and generally allow incorporation by reference to the same degree as a registered offering (see HERE); and (iv) to have post-qualification amendments declared abandoned.
In addition, as has been discussed for several years now, the new rules increase the Tier 2 offering limit. Moreover, the new rules add an eligibility standard such that an Exchange Act reporting company which is delinquent in such reports, will not qualify to rely on Regulation A.
Increase in Offering Limit
The new rules increase the maximum Regulation A Tier 2 offering from $50 Million to $75 million in any 12-month period. As such, the 30% offering limit for secondary sales has increased from $15 million to $22.5 million. Tier 1 offering limits remain unchanged.
Redaction of Confidential Information in Certain Exhibits
In March 2019, the SEC amended parts of Regulation S-K to allow companies to mark their exhibit index to indicate that portions of the exhibit or exhibits have been omitted. Under the rules, a company must include a prominent statement on the first page of the redacted exhibit stating that certain identified information has been excluded from the exhibit because it is both not material and would be competitively harmful if publicly disclosed. A company must also indicate with brackets where the information has been omitted from the filed version of the exhibit. At the time the Regulation A rules were not changed such that Regulation A filers were still compelled to submit an application for confidential treatment in order to redact immaterial confidential information from material contracts and plans of acquisition, reorganization, arrangement, liquidation, or succession.
The new rules have aligned the Regulation A requirements with those for registered offerings. The SEC has added a new instruction to the Form 1-A that allows companies to redact exhibits using the same procedure as for registered offerings. SEC staff will continue to review Forms 1-A filed in connection with Regulation A offerings and selectively assess whether redactions from exhibits appear to be limited to information that meets the appropriate standard. Upon request, companies are expected to promptly provide supplemental materials to the SEC similar to those currently required by Exchange Act reporting companies. The information that the SEC could request includes an unredacted copy of the exhibit and an analysis of why the redacted information is both not material and the type of information that the company customarily and actually treats as private and confidential. The new rules follow the updated definition of “confidential” which does not include the “competitive harm” factor in the analysis. See HERE.
Regulation A Companies are also still able to request confidentiality under Rule 83. For more on confidential treatment in SEC filings, see HERE.
Confidential Offering Statement
Companies that are conducting Regulation A offerings are permitted to submit non-public draft offering statements and amendments for review by the SEC if they have not previously sold securities pursuant to (i) a qualified offering statement under Regulation A or (ii) an effective Securities Act registration statement. Prior to the rule amendments, confidential submittals had to be filed as an exhibit to a public filing at least 21 days prior to the qualification of the offering statement, which adds time and expense to the process. Aligning with confidential treatment for registered offerings, the SEC has amended the rules to allow a company to make draft offering statements and related correspondence available to the public via EDGAR by changing the previous submission selection from “confidential” to “public.”
Incorporation by Reference
The ability to incorporate financial statements by reference to Exchange Act reports filed before the effective date of a registration statement is permitted on Form S-1, subject to certain conditions. Aligning Regulation A with the S-1 provisions, the new rules will allow previously filed financial statements to be incorporated by reference into a Regulation A offering circular. To avail itself of the ability to incorporate by reference companies that have a reporting obligation under Rule 257, or the Exchange Act must be current in their reporting obligations. In addition, companies must make incorporated financial statements readily available and accessible on a website maintained by or for the company and disclose in the offering statement that such financial statements will be provided upon request. Companies conducting ongoing offerings still need to file an annual post-qualification amendment with updated financial statements.
Abandonment of an Offering
Prior to the rule amendment, Regulation A permitted the SEC to declare an offering statement abandoned but did not provide the same authority for post-qualification amendments. The new rules now specifically allow for the SEC to declare a post-qualification filing abandoned.
Ineligibility for Delinquent Exchange Act Reporting Companies
Regulation A includes an eligibility requirement that company conducting a Regulation A offering must have filed all reports, with the SEC, required to be filed, if any, pursuant to Rule 257 during the two years before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports). When the SEC amended Regulation A to allow Exchange Act reporting companies to rely on the rule, it did not amend the provision related to delinquent filings. Accordingly, since Exchange Act companies are not required to file reports pursuant to Rule 257, a company could technically be delinquent and eligible to use Regulation A. In actuality, the SEC generally commented and pushed back on such companies, but the new rules close this loophole. In particular, companies that do not file all the reports required to have been filed by Sections 13 or 15(d) of the Exchange Act in the two-year period preceding the filing of an offering statement are ineligible to conduct a Regulation A offering.