Considerations in conducting a Regulation A offering Advantages An exempt offering, including, for example, a Regulation D offering, is subject to several limitations, and a registered public offering may be too time-consuming and costly for an issuer. Using Regulation A to offer securities may provide an issuer with an offering format that is similar to a registered offering, but is more efficient. While there are many similarities between an offering circular and a prospectus, the preparation of an offering circular is generally simpler. An offering circular is less detailed than a prospectus for a registered offering. As a result, it is typically less costly for an issuer to conduct a Regulation A offering. The costs associated with external advisers, such as counsel and auditors, also will be lower in connection with a Regulation A offering. Also, management time devoted to the preparation of the offering circular will be less.30
The review process undertaken by SEC staff is
generally shorter than the review and comment process in connection with a full registration. A registration statement on Form S-1 would always be subject to complete review by the SEC staff in connection with an issuer’s initial public offering. Timing is often the most important determinant of success for an offering. Inability to initiate an offering during a favourable market window may result in the issuer not being able to conduct an offering at all. Regulation A may provide flexibility to the issuer in this respect.
No limitation on offerees Regulation A does not impose any limitations on offerees. In contrast to Rules 505 and 506 of Regulation D, Regulation A does not limit the number of offerees or investors that can participate in an offering, nor does it impose any requirement that offerees be accredited or sophisticated investors.
Nature of securities Securities offered and sold pursuant to Regulation A are offered publicly and are not “restricted securities.” The securities are freely tradable in the secondary market (assuming that there is a secondary market) after the offering. As a practical matter, the securities likely will trade on the Pink Sheets or in the over-the-counter market unless the issuer has taken steps to list the class of securities on an exchange. No holding period applies to the holder of securities purchased in a Regulation A offering. Because an issuer may remain a non-reporting company after completion of a Regulation A offering, there may not be an active secondary market. If a smaller company chooses
52 JOBS Act Quick Start
to list a class of securities on a major exchange, it will become subject to Exchange Act reporting.31
Certain
institutional investors have limitations on the amount that they may invest in “restricted securities.” These restrictions generally would not apply to investments in securities issued pursuant to Regulation A.
Testing the waters, advertising, and general solicitation The ability to test the waters in connection with a Regulation A offering may make a Regulation A offering more appealing (if the dollar threshold is increased) than a Regulation D offering, even with the proposed relaxation of the prohibition on general solicitation for certain offerings made pursuant to Regulation 506.
Disadvantages Dollar threshold Although there are many significant benefits associated with a Regulation A offering, the dollar threshold undermines the benefits and reduces the utility of the exemption.32
Often an issuer will look to engage an
underwriter to assist with structuring and marketing the offering. Similar to a registered offering, the underwriting effort may be on a best-efforts or a firm commitment basis. The recent history of Regulation A shows that it is unlikely that a large well-established broker dealer will underwrite a Regulation A offering. With the current offering threshold of $5 million, participating in a Regulation A offering may not provide most broker-dealers with sufficient financial incentive. This is not a new issue – in fact broker-dealer participation was discussed in connection with the 1978 and 1992 amendments to Regulation A.33
These concerns
led to proposed legislation in Congress in March 2011 to amend section 3(b) of the Securities Act by increasing the offering threshold from $5 million to $50 million.
Requirement of state registration Offerings made pursuant to Regulation A must satisfy state blue sky laws in each state where the offering is to take place. Critics argue that this is one of the big impediments to more active use of Regulation A.34
Many states have not
coordinated their exemptions to accommodate Regulation A offerings.35
“covered securities” within the meaning of section 18(b) of the Securities Act.36
Regulation A securities currently are not As a result, an offering likely will
trigger a merit review in those states that are merit review states (unless waivers can be obtained), which may cause delays in qualifying Regulation A offerings. By comparison, offerings of securities listed on major exchanges (Nasdaq and NYSE) have been exempt from state review since 1996 pursuant to the NSMIA.37
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