States Challenge Regulation A+ – Securities Offerings

The recent amendments to Regulation A (often called Regulation A+) provide a manageable exemption for raising capital. The exemption can be used by both private and non-reporting trading companies such as OTC Pink listed issuers. Regulation A provides two tiers of securities offerings, with the filing obligations determined by the size of the offering.  For offerings up to $20 million, “Tier 1” allows companies to raise capital without audited financials. Tier 2 offerings allow an issuer to raise up to $50 million and audited financial statements must be provided.

Issuers conducting Tier 2 offerings will be subject to ongoing reporting obligations and other requirements..  ”Tier 2” offerings allow scaled down initial filings and ongoing reporting requirements, which should generally be less than the reporting requirements of the Securities Exchange Act of 1934. A key benefit of a Tier 2 offering is that state blue sky laws are pre-empted.

At least two states are fighting the implementation of Regulation A+. On May 27, the Federal Court of Appeals for the District of Columbia consolidated lawsuits filed against against the Securities and Exchange Commission (SEC) by the state of Montana and the commonwealth of Massachusetts.

The actions seek to prevent the implementation of Regulation A+ prior to its June 19 effective date. The states allege that the SEC exceeded the congressional mandate by pre-empting state “blue sky” review of Tier 2 offerings under Regulation A+. Accordingly, the resolution of these combined lawsuits may have significant implications for Regulation A+.