governance principles, the intended uses of proceeds, and other appropriate matters. The SEC also may require an issuer that relies on the exemption to make available to investors and file with the SEC periodic disclosures. The bad actor disqualification provisions applicable for the exemption shall be substantially similar to the disqualification provisions contained in the regulations adopted pursuant to section 926 of the Dodd-Frank Act (which looks to the bad actor disqualification provisions in current Regulation A). Not later than two years after enactment and every two
years thereafter, the SEC shall review the offering threshold and report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on its reasons for not increasing the dollar amount. Unfortunately, unlike other sections of the JOBS Act,
Title IV of the JOBS Act did not specify a time period in which the SEC was required to undertake rulemaking in order to give effect to the provisions relating to section 3(b)(2). At this time, it is not clear whether the SEC will choose to amend current Regulation A by incorporating these new requirements, or whether it will choose to adopt a new exemption under section 3(b)(2), and leave current Regulation A intact. The chart in Appendix A compares the current
Regulation A requirements and the new section 3(b)(2) exemption.60
Required study Section 402 of the JOBS Act requires that the Comptroller General must conduct a study on the impact of blue sky laws on offerings made under Regulation A. Within three months of enactment of the Act, the Comptroller General must deliver the report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. The study titled Factors that May Affect Trends in Regulation A Offerings was delivered in July 2012.61
The
study notes that there are a number of factors that have contributed to the lack of utility of the Regulation A exemption, and highlights the time and expense associated with state blue sky compliance. The study concludes that without pre-emption of the state blue sky requirements, Regulation D may continue to be used in favour of Regulation A.
Implementation efforts As of the time of writing, the Staff of the SEC has stated publicly that it has assembled a working group within the
SEC to work on implementation of the section 3(b)(2) exemption; however, the SEC has not released any proposal, nor has it indicated whether it intends to adapt the current framework for Regulation A offerings to the new exemption. Commentators have submitted letters to the SEC
regarding the section 3(b)(2) exemption, and urged the SEC to move forward quickly to propose regulations for these offerings.
Use of the section 3(b)(2) exemption Many clients have asked us why an issuer might choose to rely on section 3(b)(2) if the issuer could rely on Rule 506 of Regulation D. An exempt offering, including, for example, a Regulation D offering, may still be subject to several limitations that may not be appealing to an issuer, and a registered public offering may still be too time- consuming and costly. Using the new section 3(b)(2) provisions to offer securities can provide an issuer with an offering format that is similar to a registered offering with certain accompanying advantages, but may be more efficient. It might be especially appealing for an issuer to consider this type of offering as a precursor to an IPO. An issuer will be required to prepare and furnish certain offering disclosures in connection with a section 3(b)(2) offering, while there are no information requirements associated with a Rule 506 offering. In practice, however, most issuers will prepare some disclosure materials to share with prospective investors, even in a Rule 506 offering. An issuer may want to preserve the opportunity to approach investors that are not accredited, and may do so in connection with a section 3(b)(2) offering. Securities sold in a Rule 506 offering will be “restricted securities” that are subject to transfer restrictions. This may limit the market for the securities. An investor may have a preference for purchasing securities that are not “restricted securities” and that may be freely transferred. A non-reporting company may choose to undertake a
section 3(b)(2) offering or a Regulation D offering and remain below the shareholder threshold for required Exchange Act reporting. If it were to do so, a market for its securities may or may not develop. A non-reporting company that undertakes a section 3(b)(2) offering may also use the offering as an IPO. The new section 3(b)(2) exemption should be flexible
enough to facilitate a contemporaneous listing on a securities exchange for an issuer that elects to become a reporting company following completion of its section 3(b)(2) offering. An emerging company may be able to satisfy the market capitalisation and public float requirements of a securities exchange upon completion of
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