Guest post by Thomas J. Kim, Craig E. Chapman, John J. Sabl – Sidley Austin LLP
On June 19, 2015, the Securities and Exchange Commission’s (SEC) recently adopted rule amendments to Regulation A under the Securities Act of 1933 (the Securities Act)-colloquially known as “Regulation A+”-took effect. Regulation A is intended to ease the burden of Securities Act registration for small public offerings. These rule amendments, among other things, increase the amount of capital that can be raised in Regulation A offerings from $5 million to $50 million over a 12-month period.
The extent to which Regulation A+ will result in issuers and other market participants actually using Regulation A to raise capital will depend on a number of factors-including how it compares to other methods for raising capital, how the SEC Staff will administer the offering process and the market’s acceptance of Regulation A-compliant offering materials.
An issuer looking to raise no more than $50 million in a registered offering should seriously consider conducting the offering pursuant to Regulation A. As compared to Securities Act registration, Regulation A has fewer prescriptive disclosure requirements.  It also permits issuers to use short-form registration to immediately register a class ofequity securities under Section 12(b) of the Securities Exchange Act of 1934 (the Exchange Act), which would allow the issuer to list its shares on a national securities exchange if it otherwise meets applicable listing standards. And even where there is no listing, the largest Regulation A offerings will benefit from blue sky preemption,  whereas registered offerings of securities that are not listed on a national securities exchange do not. Consequently, conducting a Regulation A offering could result in the same public market for the offered shares as would be available in a registered offering, but with potentially lower offering and regulatory expenses and more limited exposure to liability under the Securities Act as compared to registered offerings since there is no Section 11 liability in Regulation A offerings.
If an issuer is satisfied raising capital pursuant to Rule 506 of Regulation D or Rule 144A under the Securities Act, then the primary benefit of a Regulation A offering-freely tradable securities-may not be viewed as adequately offsetting the costs and benefits of a Regulation A offering. These include not only complying with Regulation A’s specific disclosure requirements for the offering, but also dealing with the same Staff review and comment process that applies to the review of a Securities Act registration statement, which can be time-consuming, and thereafter providing annual, semi-annual and current reports to the markets if the issuer raises more than $20 million in any 12-month period. Also, as discussed below under “Liability Considerations,” the liability profile of a Regulation D or Rule 144A offering is lower than that for a Regulation A offering-which subjects the sellers to liability under Section 12(a)(2) of the Securities Act.
Scope of the Exemption
The rule amendments create a two-tiered framework for Regulation A offerings. Issuers in Tier 1 may offer and sell up to $20 million of securities over the course of a 12-month period, and issuers in Tier 2 may offer and sell up to $50 million of securities over a 12-month period. The key difference between the two tiers, other than the size of the offerings, is that a Tier 2 offering will subject the issuer to an ongoing reporting requirement of annual, semi-annual and current reports, as discussed below.
With respect to an issuer’s initial Regulation A offering, and any additional offerings during the first 12 months thereafter, the rule amendments limit secondary sales to no more than 30 percent of the aggregate offering price in the particular offering. After the expiration of the first 12 months, affiliates (but not other selling security holders) will be limited to selling no more than $6 million over a 12-month period in a Tier 1 offering and no more than $15 million over a 12-month period in a Tier 2 offering. The rule amendments eliminate the last sentence of Securities Act Rule 251(b), which prohibited affiliate resales unless the issuer had net income from continuing operations in at least one of its two last fiscal years.
Eligible Issuers and Securities
The rule amendments continue to limit the Regulation A exemption to entities organized in, and with their principal place of business in, the United States or Canada. Also, issuers must not be subject to the reporting requirements of Sections 13(a) or 15(d) under the Exchange Act or trigger the revised “bad actor” disqualification provision inRegulation A, which has been substantially conformed to the “bad actor” disqualification under Rule 506(d) ofRegulation D. Investment companies, blank check companies and issuers of fractional undivided interests in oil or gas rights also remain disqualified from Regulation A. In addition, there are two new categories of issuers that are disqualified from Regulation A: (a) issuers that were required to, but did not, file ongoing reports under Regulation A during the two years preceding the filing of a new offering circular, and (b) issuers that are, or during the five years preceding the filing of an offering circular have been, subject to an SEC order denying, suspending or revoking the registration of a class of securities pursuant to Exchange Act Section 12(j).
Only equity securities (including warrants), debt securities and debt securities convertible or exchangeable into equity interests, as well as guarantees of any such securities, are eligible to be offered and sold pursuant to the Regulation A exemption. Asset-backed securities are ineligible for the exemption.
Investment Limitations in Tier 2 Offerings
Prior to these rule amendments, Regulation A did not limit the amount of securities an investor could purchase in an offering. The rule amendments continue that approach with Tier 1 offerings. In Tier 2 offerings, however, investors that are not “accredited investors,” as defined in Rule 501 of Regulation D, are limited to purchasing no more than 10 percent of the greater of their annual income (or revenues for legal entities) or net worth (or net assets for legal entities). This limitation does not apply to accredited investors or in the event the securities issued in the Tier 2 offering are to be exchange-listed. Tier 2 issuers must notify investors of these investment limitations, but are not required to investigate further nor are they required to have a reasonable belief that the investor qualifies as anaccredited investor. Tier 2 issuers may rely on an investor’s representation that the investor is in compliance with the investment limitation (unless the issuer knew at the time of sale that any such representation was untrue).
Regulation A offerings will not be integrated with any prior offers or sales of securities, nor will they be integrated with subsequent offers or sales of securities that are registered under the Securities Act (subject to certain exceptions); made in connection with certain compensatory benefit plans, or contracts or an employee benefit plan; made pursuant to Regulation S; made more than six months after the completion of any Regulation A offering; or made in connection with a crowdfunding offering pursuant to Section 4(a)(6) of the Securities Act.
Offering Process Prior to Filing
Testing the Waters
Issuers may “test the waters” prior to filing an offering circular under Regulation A. Unlike emerging growth companies, Regulation A issuers are not restricted in the pool of potential investors they can contact, and they can use “testing the waters” solicitation materials both before and after the offering circular is filed, subject to compliance with rules on filing and disclaimers. Any such solicitation materials remain subject to the antifraud and civil liability provisions of the federal securities laws.
Any solicitation materials used prior to the public filing of an offering circular must be included as an exhibit to the offering circular. Any solicitation materials used subsequent to the public filing of an offering circular must either be accompanied by a current preliminary offering circular or include the URL where it can be obtained, and any such materials must be updated and redistributed to the extent that they or the preliminary offering circular become inadequate or inaccurate in any material respect.
Regularly released factual business communications would not constitute solicitation of interest materials underRegulation A. Whether a particular communication constitutes a regularly released factual business communication is a facts and circumstances determination; the SEC has noted that issuers can look to Securities Act Rule 169 for guidance in making this determination. The SEC has also observed that factual business communications typically include information about the issuer, its business, its financial condition and its products, and generally do not include predictions, projections, forecasts or opinions with respect to the valuation of a security.
As with draft registration statements confidentially submitted by emerging growth companies, the new rule amendments permit issuers that have never sold securities pursuant to a qualified offering circular under Regulation A or an effective registration statement under the Securities Act to submit a draft offering circular for nonpublic Staff review. Such drafts must be substantially complete upon submission and are to be submitted via the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The initial nonpublic submission, along with any nonpublic amendments thereto and correspondence submitted by or on behalf of the issuer, must be made public at least 21 calendar days before the qualification of the offering circular. This timing requirement does not depend on whether or not the issuer conducts a road show.
Unlike the draft registration statements confidentially submitted by emerging growth companies, nonpublic submissions of Form 1-A are not shielded from the requirements of the Freedom of Information Act (FOIA), which means that, under certain circumstances, the SEC may be required to provide copies of the nonpublic offering materials to a requesting party or otherwise make them publicly available. If an issuer believes that a FOIA exemption is applicable to its offering materials, it should submit them in compliance with the SEC’s Rule 83 in order to be notified of any information requests by third parties.
There are no filing fees associated with the Regulation A filing and qualification process.
Form 1-A is the offering document required to be filed with and qualified by the SEC in order to conduct a Regulation A offering, and it consists of three parts.
Part I of Form 1-A is an XML-based fillable form (similar to Form D) with drop-down menus, indicator boxes or buttons and text boxes. It will include certain issuer information; certifications that the issuer meets various eligibility criteria and is not subject to “bad actor” disqualification; information about the offering and jurisdictions in which the securities will be offered; and disclosure about unregistered issuances or sales of securities within the last year. Part I is intended to assist an issuer in determining whether it is eligible to rely on Regulation A.
Part II consists of a text file containing the offering circular, including the financial statements. Part II is required to be formatted in HTML or ASCII to be compatible with the EDGAR filing system. Issuers will not be required to submit any financial statements in interactive data format using XBRL. The rule amendments eliminate the current Form 1-A’s Model A, which consists of a “question and answer” style disclosure, and instead permit issuers to comply with either new Part II of Form I-A or Part I of Form S-1 (or Form S-11, as appropriate).
Required disclosure topics in Part II include, among other things, basic information about the issuer and the offering, material risk factors, descriptions of the issuer’s business operations and its material physical properties, management discussion and analysis (MD&A), information about the issuer’s directors, executive officers and 10 percent owners (including certain compensation disclosures), related-party transactions and the material terms of the offered securities. Issuers in Tier 1 offerings are subject to lighter disclosure requirements regarding executive and director compensation and related party transactions than issuers in Tier 2 offerings. Each of the required disclosure topics is described more fully below in the table titled “Form 1-A Disclosure Requirements.”
Both Tier 1 and Tier 2 issuers must provide balance sheets and other required financial statements for the two most recently completed fiscal years (or for such shorter time that the issuer has been in existence). Tier 1 issuers are not required to provide audited financial statements unless such financial statements are already available to the issuer. Tier 2 issuers must provide financial statements that are audited in accordance with either U.S. Generally Accepted Auditing Standards (GAAS) or the auditing standards of the Public Company Accounting Oversight Board (PCAOB).
All financial statements for U.S.-domiciled issuers must be prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), while Canadian issuers may prepare such statements in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS).
The rule amendments extend the permissible age of financial statements in Form 1-A to nine months. An offering circular will not be qualified if its balance sheet is dated more than nine months before the date of qualification. For filings made more than nine months after the issuer’s most recently completed fiscal year, the issuer must provide an interim balance sheet as of a date no earlier than six months after the end of such fiscal year, and any required interim financial statements must cover a period of at least six months.
Part III of Form 1-A includes signatures, an exhibit index and exhibits to the offering circular. The new rules maintain the existing exhibit requirements of Form 1-A, but now permit issuers to incorporate by reference certain information in documents already filed on EDGAR. Issuers should describe any information incorporated by reference and include a hyperlink to the relevant exhibit on EDGAR.
No sales of securities can be made unless and until the Form 1-A offering circular has been “qualified.” In order for aRegulation A offering circular to become “qualified,” the SEC’s Division of Corporation Finance must issue a “notice of qualification.” This process represents a modification to the qualification process under the former Regulation A, which provided for qualification without SEC action following removal of a delaying notation to the offering circular by amendment.
The rule amendments allow issuers to use Regulation A to conduct continuous or delayed offerings of securities (1) offered or sold on behalf of selling security holders, (2) offered and sold pursuant to a dividend or interest reinvestment plan, (3) issued upon the exercise of options, warrants or rights or upon conversion of other outstanding securities, (4) pledged as collateral or (5) that are part of an offering that commences within two calendar days after the qualification of the offering circular, will be offered on a continuous basis, may continue to be offered for more than 30 days after the qualification date and will be offered in an amount reasonably expected to be offered and sold within two years of the initial qualification date.
Updating Offering Circulars and Use of Offering Circular Supplements
Issuers will no longer be required to amend and re-qualify the offering circular simply to account for changes in the information therein. Instead, issuers will re-qualify their offering circulars annually to include updated financial statements, or otherwise as necessary to reflect fundamental changes to the information set forth in the offering circular. Offering circular supplements may be used to provide final pricing information where the offering circular was qualified on the basis of a price range estimate, to reflect a decrease in the volume of the securities offered or to change the price range of the securities offered, subject to limitations similar to those of registered offerings. In a process similar to Securities Act Rule 430A for registered offerings, the new rules further permit offering circulars to omit, and subsequent offering circular supplements to provide (within two business days of the earlier of the offering’s pricing or the date of first use of the offering circular) underwriting syndicate information and certain items dependent on the offering price or delivery date.
Unless they are subject to, and current in, Tier 2 reporting, Regulation A issuers will be required to deliver a preliminary offering circular 48 hours before the sale to “any person that before qualification of the offering circular had indicated an interest in purchasing securities in the offering, including those persons that responded to an issuer’s solicitation of interest materials.” This is analogous to Securities Act Rule 174’s delivery requirement for initial public offering preliminary prospectuses. The rule amendments require that, where an issuer (or any participating broker-dealer) uses a preliminary offering circular to offer securities to prospective purchasers during the pre-qualification period, the issuer (or broker-dealer) must deliver such preliminary offering circular to prospective purchasers at least 48 hours prior to the sale of Regulation A securities, unless the issuer is already subject to Tier 2 reporting obligations.
“Access equals delivery” for Regulation A offering circulars. An issuer may satisfy its final offering circular delivery requirements by filing on EDGAR, provided any preliminary offering circular includes a notice informing potential investors that the issuer will rely on access equals delivery. The new rules further require that an issuer (or participating broker-dealer) provide to purchasers of Regulation A securities, within two business days of completion of any sale, a copy of the final offering circular or a notice stating that the sale occurred pursuant to a qualified offering circular and including the URL where the final offering circular may be obtained on EDGAR and contact information sufficient to notify a purchaser where a request for a final offering circular can be sent.
“Electronic-only” Regulation A offerings are permitted, provided that issuers and participating intermediaries obtain the consent of investors to, or otherwise be able to evidence the receipt of, the electronic delivery of
(1) the preliminary offering circular and information other than the final offering circular, in instances when sales are made based on offers made using the preliminary offering circular, and (2) the final offering circular, when sales are made based on post-qualification offers.
Because the materials relating to a Regulation A offering will be filed on EDGAR, the new rules do not require issuers to maintain a corporate website to provide additional access to such filings.
Offerings under Regulation A are not registered under the Securities Act. Therefore, the liability provisions of Section 11 of the Securities Act for any material misstatements or omissions-which is strict liability for the issuer, and liability for executive officers, directors and the auditor subject to a due diligence defense-do not apply to these offerings, which is a significant and meaningful difference from registered offerings.
However, Section 3(b)(2)(D) of the Securities Act provides that there will be “seller” liability under Section 12(a)(2) of theSecurities Act for sellers of securities in Regulation A offerings. As a result, the liability profile of offerings conducted pursuant to Regulation A will be greater than in Section 4(a)(2) or Rule 506 or Rule 144A offerings, as a plaintiff does not have to prove “scienter” in a Section 12(a)(2) action as it would in a case brought under Section 10(b) of the Exchange Act with respect to a private offering.
Blue Sky Qualification
The JOBS Act provides that Regulation A securities are “covered securities” for the purposes of exemption from state law registration and qualification, provided they are (1) offered or sold on a national securities exchange or (2) offered or sold to a qualified purchaser. One of the most significant aspects of the rule amendments is that they define a “qualified purchaser” as any investor in a Tier 2 offering. Accordingly, all Tier 2 offerings are exempt from statesecurities law registration and qualification requirements. Tier 1 offerings will be subject to state registration and qualification requirements.  Issuers should note that both Tier 1 and Tier 2 offerings remain subject to state antifraud enforcement and filing and fee requirements, consistent with the federal preemption framework of theSecurities Act.
Continuing Disclosure Obligations
Completion of Offering Report
Following the termination or completion of an offering, the rule amendments require disclosure about the offering on either a new Form 1-Z exit report (for Tier 1 issuers and Tier 2 issuers that are suspending their ongoing reporting obligations) or in Part I of a new Form 1-K annual report (for Tier 2 issuers subject to ongoing reporting obligations). These forms replace the old Form 2-A and require disclosure of basic offering information, such as the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold, the price of such securities, the proportion of secondary sales included in the offering, fees associated with the offering and net proceeds to the issuer.
Tier 2 Ongoing Reporting
Tier 1 issuers are not subject to any ongoing reporting obligations. Tier 2 issuers will be required to file annual reports on Form 1-K, semiannual reports on new Form 1-SA and current reports on new Form 1-U. If they qualify, Tier 2issuers may suspend their ongoing reporting obligations, in which event they would need to complete the Form 1-Z exit report, as discussed more fully below. All ongoing and exit reports are required to be filed on EDGAR.
The annual report on Form 1-K is required to be filed within 120 days after fiscal year-end. Part I of Form 1-K will be an online XML-based fillable form that will include certain basic information about the issuer (pre-populated based on information previously disclosed on Form 1-A). If applicable, an issuer will also include summary information on any recently terminated or completed Regulation A offerings in Part I, as noted above. Part II will consist of a text file attachment containing the body of the disclosure document and financial statements, formatted to be compatible with filing on EDGAR. Part II of Form 1-K will cover information on business operations of the issuer for the prior three fiscal years (or since inception, if in existence for less than three years), certain related-party transactions, and the issuer’s directors, executive officers and significant employees (including certain data regarding their compensation and beneficial ownership of voting securities). Part II will also include an MD&A covering the two most recently completed fiscal years and two years of audited financial statements, subject to the same requirements as those submitted under Form 1-A.
The semiannual report on Form 1-SA is required to be filed within 90 days after the end of the first six months of an issuer’s fiscal year, with reporting obligations commencing immediately following the most recent fiscal year-end for which financial statements were included in the issuer’s Form 1-A offering circular. Form 1-SA will consist primarily of financial statements and an MD&A, along with disclosure of information that would otherwise be reportable in a current report on Form 1-U, as discussed more fully below.
Tier 2 issuers are required to file current reports on Form 1-U to report on the following events within four business days after their occurrence:
- Fundamental changes, including material definitive agreements which result or would reasonably be expected to result in fundamental changes to the nature of the issuer’s business or plan of operations;
- Bankruptcy or receivership;
- Material modification to the rights of security holders;
- Changes in the issuer’s certifying accountant;
- Non-reliance on previous financial statements or a related audit report or completed interim review;
- Changes in control of the issuer;
- Departure of the principle executive, financial or accounting officer; and
- Unregistered sales of 10 percent or more of outstanding equity securities.
Form 1-U further allows for the disclosure of other events or information not directly required by the form, such as the provision of relevant financial information to the market on a quarterly basis.
Exchange Act Registration; Exchange Listing
Section 12(g) of the Exchange Act requires an issuer with total assets in excess of $10 million to register any class ofequity securities held of record by more than 2,000 persons (or more than 500 persons who are not accredited investors) as of fiscal year-end. The rule amendments exempt any securities issued in a Tier 2 offering from Section 12(g) registration, provided the issuer remains subject to and current in its ongoing Regulation A reporting obligations and has a public float of less than $75 million (or, in the absence of a public float, annual revenues of less than $50 million). Issuers that exceed either of these thresholds will have two years to transition to Exchange Act registration and reporting. Another condition to this exemption is that issuers must retain a registered transfer agent to record stock transfers.
For issuers listing securities on a national securities exchange and therefore required to register such securities under Section 12(b) of the Exchange Act, the rule amendments provide that issuers may forego filing a Form 10 registration statement and instead file a Form 8-A short-form registration statement concurrently with the qualification of a Form 1-A offering circular, provided the Form 1-A complies with Part I of Form S-1 (or Form
S-11, where applicable), rather than Part II of Form 1-A, and includes financial statements audited by a registered public accounting firm. Issuers may re-qualify a previously qualified offering circular in order to utilize Form 8-Aregistration.
Upon becoming an Exchange Act registrant, an issuer’s Regulation A reporting obligations will automatically be suspended.
Current Public Information Requirements under Exchange Act Rule 15c2-11(a) and Securities Act Rules 144 and 144A
The annual, semiannual and current reports filed by Tier 2 issuers will satisfy the specified information that a broker-dealer must review before publishing a quotation for a security for the purposes of Exchange Act Rule 15c2-11(a).
These reports will not, however, satisfy the current information requirements of Rule 144 and Rule 144A continuously throughout the fiscal year. Instead, issuers will need to voluntarily and timely provide quarterly financial information on Form 1-U in order to have “reasonably current information” and “adequate current public information” for the entirety of the year. As securities issued in Regulation A offerings are not restricted securities, this issue is relevant mostly for affiliates who are selling pursuant to Rule 144.
Suspension of Tier 2 Ongoing Reporting Obligations
A Tier 2 issuer may suspend its ongoing reporting obligations under Regulation A at any time after completing reporting for the fiscal year in which its offering circular was qualified by filing an exit report on Form 1-Z. A Tier 2issuer is eligible to file a Form 1-Z if: (1) it has filed all reports required by Regulation A for its three most recent fiscal years and the current portion of its fiscal year preceding suspension of such obligations (or since it became subject to ongoing reporting obligations, if less than three fiscal years), (2) the securities of each class to which the offering circular relates are held of record by fewer than 300 persons (or, in the case of banks and bank holding companies, 1,200 persons) and (3) there are no ongoing offers or sales pursuant to a qualified
Tier 2 offering circular.
 It is important to note that if the Regulation A market generally, or for a particular offering or type of offering, would require disclosure comparable to Securities Act—registered offerings-which could happen if the Regulation A market takes after the Rule 144A market—hen the less burdensome disclosure requirements of Regulation A may not provide significant benefits.
 It should be noted that Massachusetts and Montana have filed petitions for judicial review of the provisions in theRegulation A rule amendments preempting state securities law registration and qualification requirements. Both claim that the rule amendments are arbitrary and capricious and request vacatur of the rule amendments and a permanent injunction prohibiting the SEC from implementing and enforcement the rule amendments. See Petition for Review,Galvin v. SEC, Case No. 15-1150 (D.C. Cir. May 22, 2015) (this is Massachusetts’s petition; Montana’s petition has been consolidated with Massachusetts’s).
 The North American Securities Administrators Association (NASAA) has implemented a multi-state coordinated review program for Regulation A offerings, under which issuers may file offering materials with the states via e-mail, have a lead disclosure (and, if applicable, lead merit) examiner selected and receive comments within a contemplated 21 business days. A vast majority of states have adopted and implemented the program, which may therefore reduce state disclosure and compliance obligations for Tier 1 issuers. Further information on the NASAA’s Coordinated Review Program is available at http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings.
Thomas J. Kim, Partner, email@example.com
TOM KIM focuses his practice on advising companies, underwriters and boards of directors on registered and exempt capital markets transactions, SEC regulatory and reporting issues, and corporate governance, as well as on general corporate and securities matters.
Full Biography (http://www.sidley.com/en/people/thomas-j-kim)
Craig E. Chapman, Partner, firstname.lastname@example.org
CRAIG E. CHAPMAN, a practice area team leader of the firm’s Securities practice, joined Sidley in 1983 and has been a partner since 1992. He was a resident partner in the firm’s Tokyo office from 1992 to 1995 and in its London office from 2006 to 2009. Craig focuses his practice on debt and equity securities offerings and placements and general corporate matters. He is actively involved in the development and execution of cross-border and complex financial products.
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John J. Sabl, Partner, email@example.com
JOHN J. SABL is a partner in the Corporate and Securities practice group in the Chicago office. He represents clients in a broad range of corporate and securities matters, including public and private securities offerings, mergers and acquisitions, joint ventures, private equity investments, affordable housing and other investment funds, restructurings, major contractual matters and corporate counseling assignments. His experience spans a number of industries, such as insurance and other financial services, affordable housing, investment management, communications and media, agribusiness, capital goods, information services, consumer products, manufacturing and real estate.
Full Biography (http://www.sidley.com/en/people/sabl_john)
Sidley Austin LLP
Sidley provides a broad range of legal services to meet the needs of our diverse client base. The strategic establishment of our offices in the key corporate and financial centers of the world has enabled us to represent a broad range of clients that includes multinational and domestic corporations, banks, funds and financial institutions.
Sidley has a broad transactional practice. Major practice disciplines include corporate and securities, mergers and acquisitions, securitization, intellectual property, funds and other pooled investments, bankruptcy and corporate reorganization, bank and commercial lending, public finance, real estate, project finance, tax and employee benefits, as well as trusts and estates.