OTC Markets Prepares For Regulation A+ – Going Public

On March 25, 2015, the Securities and Exchange Commission (“SEC”) adopted amendments to Regulation A. The new rules, known as “Regulation A+,” update and expand the existing Regulation A, and are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act passed in 2012. Regulation A+ is effective on June 19, 2015. The rule is expected to have a significant impact on the capital raising process for small companies by allowing issuers to raise up to $50 million without all of the requirements of a public offering but potentially providing many of the benefits. OTC Markets Group recently published proposed amendments to the OTCQB Standards to conform to the SEC’s recent amendments. The OTC Markets proposed rules are scheduled to become effective July 10, 2015.

Eligibility – Regulation A Offerings

The use of Regulation A+ is limited to companies organized in and with their principal place of business in the United States or Canada.  Regulation A is not be available to companies that:

• Are already SEC reporting companies and certain investment companies.
• Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
• Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights.
• Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years.
• Have not filed ongoing reports required by the rules during the preceding two years.
• Are disqualified under the “bad actor” disqualification rules.

Regulation A – Two Tiers Of Offerings

Regulation A provides for two tiers of securities offerings:

• Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
• Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

In addition to the limits on secondary sales by affiliates, Regulation A+ also limits sales by all selling security-holders to no more than 30 percent of a particular offering in the issuer’s initial Regulation A offering and subsequent Regulation A offerings for the first 12 months following the initial offering.

For offerings of up to $20 million, the issuer could elect whether to proceed under Tier 1 or Tier 2.  Both tiers would be subject to basic requirements as to issuer eligibility, disclosure, and other matters, drawn from the current provisions of Regulation A.  Both tiers would also permit companies to submit draft offering statements for non‑public review by the SEC before filing, permit the continued use of solicitation materials after filing the offering statement, require the electronic filing of offering materials and otherwise align Regulation A with current practice for registered offerings.

Additional Requirements For Tier 2 Offerings

Tier 2 offerings would be subject to additional requirements, including:

• A requirement to provide audited financial statements.
• A requirement to file annual, semiannual and current event reports.
• A limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth.

Exemption From Mandatory Registration in Tier 2 Offerings

Regulation A exempts securities in a Tier 2 offering from the mandatory registration requirements of Exchange Act Section 12(g) if the issuer meets all of the following conditions:

• Engages services from a transfer agent registered with the Commission.
• Remains subject to a Tier 2 reporting obligation.
• Is current in its annual and semiannual reporting at fiscal year-end.
• Has a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.

An issuer that exceeds the dollar and Section 12(g) registration thresholds would have a two-year transition period before it must register its class of securities, provided it timely files all of its ongoing reports required under Regulation A.

Preemption of Blue Sky Law

In light of the total package of investor protections included in amended Regulation A, the rules provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers,” defined to be any person to whom securities are offered or sold under a Tier 2 offering.

The OTC Markets Addresses Regulation A+

Under the OTC Markets Group amended standards, issuers utilizing Tier 2 of Regulation A will qualify for the OTCQB Venture Marketplace. Issuers may use Regulation A+ disclosures to qualify for the initial and ongoing OTCQB disclosure requirements. These disclosure requirements include:

• The Regulation A+ Reporting Company, must have filed all reports required to be filed on EDGAR.
• Audited annual financial statements must be prepared in accordance with Regulation A+.
• A new OTCQB Certification indicating that a Regulation A Reporting Company is required to file periodic reports with the SEC under Tier 2 of Regulation A+ must be provided.
• A Regulation A Reporting Company must file, on an ongoing basis, all annual, semi-annual and other interim reports required to be filed on EDGAR. Audited annual financial statements must be prepared in accordance with Regulation A+.

Regulation A+ provides a manageable capital-raising alternative for small business going public or stay private. With Regulation A+ becoming effective on June 19th, issuers should consider the new rules when structuring their securities offerings and going public transactions.

For further information about Regulation A+ and this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida,(561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities & Going Public Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com