Expansion Of Regulation A To Reporting Companies: Increased Alternatives Now Available To Public Companies Seeking To Raise Capital Or For Mergers And Acquisitions

On December 19, 2018, the SEC announced that it had adopted final rules that allow reporting companies to rely on the Regulation A exemption from registration for their securities offerings.1

Until recently, the only way that companies subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") have been able to access the capital markets has been through a private placement in public equity (PIPE) or a traditional registered public offering. PIPE's have presented a number of issues regarding confidentiality, illiquidity of securities, limitations on offering size2 and greater pricing discounts, whereas registered public offerings can be both time-consuming and costly. These issues are particularly magnified for smaller public companies that may not be eligible to use S-3 shelf registrations.

In announcing the new rules, SEC Chairman, Jay Clayton, stated "[t]he amended [Regulation A] rules will provide reporting companies additional flexibility when raising capital." This additional flexibility will assist reporting companies in raising capital by reducing costs and streamlining the registration process similar to the streamlined process of registering securities on a Form S-3.

Regulation A provides an exemption from the registration requirements of the Securities Act of 1933, as amended, for offerings of securities that do not exceed $50 million in a 12 month period, and was only initially available to companies that were not subject to the reporting requirements of the Exchange Act.

Reporting companies may want to consider using Regulation A for reasons including, but not limited to the following:

Tier 2 issuers that are not listed on national exchanges are eligible for blue sky preemption. This means that OTC listed issuers do not have to make blue sky filings on a state by state basis for a public offering - this is particularly significant for smaller (OTC listed) issuers that traditionally were only able register their secondary offerings in a very limited number of states; Tier 2 issuers may solicit investors such as qualified institutional buyers, accredited investors and non-accredited investors before the SEC qualifies an offering circular which permits an issuer to gauge investor interest prior to launching the offering; Subject to certain regulations, securities issued in a Regulation A offerings are unrestricted and freely tradeable; and Regulation A offers...