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March 25 was a significant day for the world of IPOs, small business and the small-cap markets. The SEC voted unanimously to adopt final rules implementing changes to Regulation A which were mandated by the Jumpstart our Business Startups (JOBS) Act of 2012. It took a while to get the rules completed, but they are final at last. I will have much more to say once the actual rule text is released, but based on the presentation today I am extremely excited about the potential game-changing nature of these developments.
The basic concept of Regulation A+, as it has become known, will allow a non-reporting or private company to complete a public offering of up to $50 million with a streamlined process of SEC review and disclosure. At the same time, a number of investor protections will be included. These include mandatory audits of financial statements for those seeking the greater benefits of the rule, ongoing reporting obligations after the offering is completed and a limit on how much an unaccredited investor can invest. Here are the five key attributes of new Regulation A+ based on the SEC staff presentations today:
1. Blue sky preempted. New Regulation A will be in two tiers. Tier I will be raising up to $20 million and Tier II will be raising up to $50 million. A company raising any amount can choose to do as as a Tier II company, with greater disclosure and reporting obligations. But Tier II companies can complete their offering with no state blue sky merit review of the offering. This is simply huge and was the result of a very intense battle which the SEC won over the lobbying efforts of the states.
2. Test the waters. Underwriters and companies will be allowed to “test the waters” of a potential investment with any investor (not just institutional ones as in a normal IPO) both before and after filing your disclosure statement. This could be a big cost-saver as some companies will not go forward with an offering if investors do not seem interested.
3. Reduced disclosure and confidential filing. All the major company information will still be there, but there will be a noticeable reduction in the overall level of disclosure. For example, Regulation A issuers don’t need to talk about their relationship with conflict minerals. And as with other IPOs, you will be able to file confidentially and go through rounds of SEC comments before deciding whether the public (or your competitors) should be aware of your filing.
4. Reduced reporting and path to full reporting. A Tier II company must participate in a reduced disclosure regime of filing twice a year instead of four times a year, but no insider or proxy filings will be necessary. The OTCQB, we believe, plans to allow these companies to trade on its platform which otherwise only permits full SEC reporting companies. The rule also allows a simple filing on short form 8-A to choose to become a full SEC reporting company after the Regulation A offering is complete. Many investors will prefer a path to full reporting.
5. Resale offer of up to $15 million. A company can choose to seek trading for already issued shares as its method of going public, or add that to an IPO. The rule allows a resale of up to $15 million worth of stock each year. So a private offering, followed by a Regulation A resale offering may become a very attractive way to go public.
As much as I have been an advocate for other IPO alternatives such as reverse mergers and self-filings, I have always said these wouldn’t be necessary if IPOs were easier to do. With the passage of these new rules today, the SEC has opened the door to that easier and more attractive IPO while also retaining very strong investor protections.
Read additional articles at the David Feldman Blog.
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