The Securities and Exchange Commission (SEC) adopted final rules to enable smaller companies access to capital. The new rules were mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act and expand Regulation A, an existing exemption from registration for smaller issuers of securities. The updated exemption will allow smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. Previously, Regulation A only allowed an exemption for companies offering up to $5 million of securities in a 12-month period.

The final rules have two tiers of offerings: Tier 1, for offerings up to $20 million in 12-month period; and Tier 2, for offerings of securities of up to $50 million in 12-month period. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements. In addition to the limits on secondary sales by affiliates, the rules also limit 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. Both tiers would also permit companies to submit draft offering statements for non-public review by Commission staff 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. In addition to these basic requirements, companies under Tier 2 have requirements to:

  • Provide audited financial statements
  • File annual, semiannual and current event reports
  • Limitation on the amount of securities non-accredited investors can purchase of no more than 10 percent of the greater of the investor’s annual income or net worth

The exemption would be limited to companies organized in and with their principal place of business in the United States or Canada and is not 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 merger or acquisition with unidentified company
  • Are seeking to offer and sell asset-backed securities or fractional undivided interest 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

The rule amendment becomes effective 60 days after publication in the Federal Register.

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