The Regulation A amendments adopted by the Securities Exchange Commission on March 25 are Federal Registerbeing published tomorrow, April 20, in the Federal Register.  That means the final rules and form amendments will officially become effective on June 19, 2015 (by rule, 60 days after such publication).

The new Regulation A, referred to widely as Regulation A+, increases the offering cap from $5 million to $50 million with reasonable investor protection safeguards.  I previously summarized the regulation here.  The main reform features of the new regs are blue sky preemption for Tier II offerings, broader “testing the waters”, scaled disclosure and modified reporting.

Reg A+In theory, Reg A+ has the potential to provide growth companies with a viable alternative to a traditional S-1 IPO, albeit with a more cost effective runway and scaled disclosure than even the streamlined emerging growth company pathway under JOBS Act Title I.  It remains to be seen whether a sufficiently robust small public company ecosystem will develop to support companies that go public through Reg A+.

Importantly, new Reg A+ also reforms the resale rules in a significant respect by eliminating the requirement under old Reg A that issuers must have had net income from continuing operations in at least one of its last two fiscal years for affiliate resales to be permitted.  This is a sensible reform inasmuch as many emerging companies experience net losses for several years due to high research and development costs.  Absence of net income, by itself, is not a sufficient indicator of enhanced risk, and increasing selling stockholder access to avenues for liquidity will encourage investment in emerging companies.

Last month, the SEC released its Final Report on the 2012 SEC Government-Business Forum on Small Business Capital Formation, the SEC’s annual forum to address perceived unnecessary impediments to small business capital formation. Participants typically include small business executives, VCs, government officials, trade association representatives, lawyers, accountants, academics and small business advocates.  The Report contains a prioritized list of 35 recommendations collectively made by the Forum’s participants (not necessarily endorsed by the SEC), many of which were addressed to the SEC’s JOBS Act rulemaking efforts .

Receiving the most attention by far was equity crowdfunding, which was the subject of 11 separate recommendations including the six with the highest priority.  Other areas of concern in order of priority included the elimination of the prohibition on general solicitation and advertising from “accredited investor only” Rule 506 sales, definition of “accredited investor”, small public offerings under so-called “Regulation A+”, “bad boy” disqualifications from Reg D offerings, and “micro-offering” exemption for non-reporting companies.

Here are some of the highlights of the Report’s recommendations:

  •  Crowdfunding:  Simplify disclosure rules, taking into account size and stage of development of the issuer (including whether the issuer is a start-up); flexibility on financial statement rules, including raising the trigger for audited financials; permitting concurrent offerings on same terms to accredited investors (with no investment limit) in excess of the $1 million limit; investor self-certification of investment limits; and safe harbors for platforms and other crowdfunding players.

 

  • Accredited Investor-Only Private Offerings:  Safe harbors, including presumption of accreditation if investor meets SEC established minimum investment threshold; sliding scale of steps to verify accreditation based on facts and circumstances surrounding offering, e.g., issuer’s familiarity and pre-existing relationship with the potential investor.

 

  • Definition of “Accredited Investor”: Retain current income and net worth levels in definition of “accredited investor”.

 

  • Reg A+ Small Offerings: Make a Reg A+ filed security a “covered security” (i.e., state registration requirements do not apply); and scaled disclosure.

 

  • “Bad boy” disqualifications from Reg D offerings: Target true bad actors without imposing a disqualification so broad as to affect persons who may not be true bad actors.

 

  • “Micro-offering” exemption:  Adopt true “micro-offering” exemption for non-reporting companies with only minimal conditions (e.g., “friends and family” offerings well below $1 million crowdfunding threshold).

 

  • Smaller Reporting Companies:  Increase maximum amount of public float in the definition of “smaller reporting company” from $75 million to $250 million.

 

  • Auditor Attestation Exemption:   Expand SOX 404(b) exemption to companies with less than $250 million of public float and possibly up to $500 million of public float.