Regulation A CD&I Released- Going Public Attorneys

On June 19, 2015, new rules expanding Regulation A became effective.  The expanded rule is commonly known as Regulation A+. The new rule which was promulgated under the Jumpstart Our Business Startups Act (JOBS Act), permits certain small companies to sell up to $50 million of their securities within any 12-month period.  The Securities and Exchange Commission (SEC) recently released 11 new Compliance and Disclosure Interpretations (C&DIs) for expanded Regulation A+.

As amended Regulation A+  provides for two tiers of offerings.  Tier 1 provides for offerings of securities 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 provides for offerings of securities 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.  Unlike Regulation A+ Tier 1 offerings, offerings made pursuant to Tier 2 are subject to  ongoing SEC reporting requirements.

Among other things, the CD&Is address eligibility to use Regulation A+ by companies with operations or a principal place of business outside the U.S.,  the use of social media and providing non-public information to the SEC.

The CD&Is are summarized below:

Question: Where an issuer elects to non-publicly submit a draft offering statement for staff review pursuant to Rule 252(d) of Regulation A before publicly filing its Form 1-A, Item 15 (Additional Exhibits) of Part III (Exhibits) to Form 1-A requires issuers to file as an exhibit to the publicly-filed offering statement: (1) any non-public, draft offering statement previously submitted pursuant to Rule 252(d), and (2) any related, non-public correspondence submitted by or on behalf of the issuers. Would an issuer that elects to make the non-public, draft offering statements public on the EDGARLink submissions page of EDGAR of Volume II of the EDGAR Filer Manual at the time it publicly files its Form 1-A also be required to refile such material as an exhibit pursuant to Item 15 of Part III?

Answer: No. If, at the time it first files the offering statement publicly, the issuer makes public on the EDGARLink submissions page all prior non-public, draft offering statements, the offering statements will no longer be non-public and the issuer will not be required to file them as exhibits. The issuer is still required to file as an exhibit any related, non-public correspondence submitted by or on behalf of the issuer regarding non-public draft offering statements submitted pursuant to Rule 252(d).

Question: If an issuer elects to submit a draft offering statement for non-public staff review before public filing pursuant to Rule 252(d), and, as part of that process, submits correspondence relating to its offering statement, what must it do if it wants to protect portions of that correspondence from public release?

Answer: During the review of the draft offering statement, the issuer would request confidential treatment of any information in the related correspondence pursuant to Rule 83, in the same manner it would during a typical review of a registered offering. It would submit a redacted copy of the correspondence via EDGAR, with the appropriate legend indicating that it was being submitted pursuant to a confidential treatment request under Rule 83. At the same time, it would submit an unredacted paper version to the SEC, in the manner required by that rule. When the issuer makes its public filing of the offering statement, it will be required to file as an exhibit to the electronically filed offering statement any previously submitted non-public correspondence related to the non-public review. Since that correspondence will be information required to be filed with the SEC, the issuer must redact the confidential information from the filed exhibit, include the required legends and redaction markings, and submit in paper format to the SEC’s Office of the Secretary an application for confidential treatment of the redacted information under Rule 406. The staff will consider and act on that application in the same manner it would with any other application under Rule 406 for other types of filed exhibits. As with registered offerings, the review staff will act on Rule 406 confidential treatment applications before the offering statement is qualified. For the requirements a registrant must satisfy when requesting confidential treatment, see Division of Corporation Finance Staff Legal Bulletin No. 1 (with Addendum).

Question: Would a company with headquarters that are located within the United States or Canada, but whose business primarily involves managing operations that are located outside those countries be considered to have its “principal place of business” within the United States or Canada for purposes of determining issuer eligibility under Regulation A?

Answer: Yes, an issuer will be considered to have its “principal place of business” in the United States or Canada for purposes of determining issuer eligibility under Rule 251(b) of Regulation A if its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the United States or Canada.

Question: Is a company that was previously required to file reports with the Commission under Section 15(d) of the Exchange Act, but that has since suspended its Exchange Act reporting obligation, an eligible issuer under Rule 251(b)(2) of Regulation A?

Answer: Yes. A company that has suspended its Exchange Act reporting obligation by satisfying the statutory provisions for suspension in Section 15(d) of the Exchange Act or the requirements of Exchange Act Rule 12h-3 is not considered to be subject to Section 13 or 15(d) of the Exchange Act for purposes of Rule 251(b)(2) of Regulation A.

Question: Is a voluntary filer under the Exchange Act an eligible issuer for purposes of Rule 251(b)(2) of Regulation A?

Answer: Yes. A voluntary filer is not subject to Exchange Act Section 13 or 15(d) because it is not obligated to file Exchange Act reports pursuant to either of those provisions. [June 23, 2015]

Question: Is a private wholly-owned subsidiary of an Exchange Act reporting company parent eligible to sell securities pursuant to Regulation A?

Answer: Yes, although the Exchange Act reporting company parent could not be a guarantor or co-issuer of the securities of the private wholly-owned subsidiary.

Question: Can Regulation A be relied upon by an issuer for business combination transactions, such as a merger or acquisition?

Answer: Yes. The final rules do not limit the availability of Regulation A for business combination transactions, but, as the Commission (SEC Rel. No. 33-9497) indicated, Regulation A would not be available for business acquisition shelf transactions, which are typically conducted on a delayed basis.

Question: May a recently created entity choose to provide a balance sheet as of its inception date?

Answer: Yes, as long as the inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date. The date of the most recent balance sheet determines which fiscal years, or period since existence for recently created entities, the statements of comprehensive income, cash flows and changes in stockholders’ equity must cover. When the balance sheet is dated as of inception the statements of comprehensive income, cash flows and changes in stockholders’ equity will not be applicable.

Question: Can an issuer solicit interest (or “test the waters”) in a Regulation A offering on a platform that limits the number of characters or amount of text that can be included, thereby preventing the inclusion in such communication of the information required by Rule 255?

Answer: Yes. The staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 255 in the following limited circumstances:

• The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
• Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
• The communication contains an active hyperlink to the required statements that otherwise satisfy Rule 255 and, where possible, prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the entirety of the required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required statements would be inappropriate.

Question: Are state securities law registration and qualification requirements preempted with respect to resales of securities purchased in a Tier 2 offering?

Answer: No. State securities law registration and qualification requirements are only preempted with respect to primary offerings of securities by the issuer or secondary offerings by selling security holders that are qualified pursuant to Regulation A and offered or sold to qualified purchasers pursuant to a Tier 2 offering. Resales of securities purchased in a Tier 2 offering must be registered, or offered or sold pursuant to an exemption from registration, with state securities regulators.

Question: When is an issuer required to engage the services of a registered transfer agent before being able to avail itself of the conditional exemption from mandatory registration under Section 12(g) of the Exchange Act described in Exchange Act Rule 12g5-1(a)(7)?

Answer: An issuer that seeks to rely on the conditional exemption from mandatory registration under Section 12(g) of the Exchange Act must at the time of reliance on the conditional exemption satisfy the requirements of Rule 12g5-1(a)(7).

Question: When an issuer with an effective Form S-3 registration statement no longer satisfies the applicable Form S-3 requirements, how can the issuer update the registration statement for purposes of complying with Section 10(a)(3)?

Answer: The issuer can update the registration statement by filing a post-effective amendment on a Securities Act registration form for which it qualifies at the time of filing such amendment, such as a Form S-1 or Form S-11.

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

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