Final Rules
We are adopting the issuer eligibility criteria as proposed. Under the final rules, Regulation A will be limited to companies organized in and with their principal place of business in the United States or Canada. It will be unavailable to:
companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act;
58 Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter; Letter from U.S. Senator Pat Roberts, May 27, 2014 (“Sen. Roberts Letter”); Letter from Jack H. Brier, President and Founder, US Alliance Corporation, March 19, 2014 (“US Alliance Corp. Letter”).
59 Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter.
60 BIO Letter.
61 Andreessen/Cowen Letter; CFIRA Letter 1; OTC Markets Letter.
62 CFIRA Letter 1. Before amendments to Regulation A were adopted in 1992, Exchange Act reporting companies were permitted to conduct offerings in reliance on Regulation A, provided they were current in their public reporting. See 17 CFR 230.252(f) (1992).
companies registered or required to be registered under the Investment Company Act of 1940 and BDCs;
blank check companies;
issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights;
issuers that are required to, but that have not, filed with the Commission the ongoing reports required by the rules under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports);
issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement;63 and
issuers subject to “bad actor” disqualification under Rule 262.64
We expect that the amendments we are adopting will significantly expand the utility of the Regulation A offering exemption.
Our approach in the final rules is generally to maintain the issuer eligibility requirements of existing Regulation A with the limited addition of two new categories of ineligible issuers. We believe this approach will provide important continuity in the Regulation A regime as it expands in the way Congress mandated. For this reason, we do not believe it is necessary to adopt final rules to exclude issuers that are currently eligible
63 See Rule 251(b).
64 See Rule 262.
to conduct Regulation A offerings. Additionally, we recognize that expanding the categories of eligible issuers, as suggested by a number of commenters, could provide certain benefits, including increased investment opportunities for investors and avenues for capital formation for certain issuers. We are concerned, however, about the implications of extending issuer eligibility before the Commission has the ability to assess the impact of the changes to Regulation A being adopted today. In light of these changes, we believe it prudent to defer expanding the categories of eligible issuers (for example, by including non-Canadian foreign issuers, BDCs, or Exchange Act reporting companies) until the Commission has had the opportunity to observe the use of the amended Regulation A exemption and assess any new market practices as they develop.
Additionally, we are not adopting further restrictions on eligibility at this time. In light of the disclosure requirements contained in the final rules, we do not believe that it is necessary to exclude additional types of issuers, such as shell companies, issuers of penny stock, or other types of investment vehicles, from relying on the exemption in Regulation A. At the same time, we are concerned about potentially increased risks to investors that could result from extending issuer eligibility to other types of entities, such as blank check companies, before the Commission has the opportunity to observe developing market practices. We therefore believe the prudent approach with respect to any potential expansion of issuer eligibility is to give the Regulation A market time to develop under rules that we are adopting today. We also do not believe it is necessary to limit availability of the exemption to issuers of a certain size, as we agree with commenters that suggested that the annual offering limit will serve to limit the utility of the exemption for larger issuers in need of greater amounts of capital. We further do not
believe that it is appropriate to limit the availability of the exemption to “operating companies,” as that term would restrict availability of the exemption to fewer issuers than are currently eligible under Regulation A, such as by excluding shell companies.
As proposed, the final rules include two new issuer eligibility requirements that add important investor protections to Regulation A. First, potential issuers must have filed all required ongoing reports under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports) to remain eligible to conduct offerings pursuant to the rules. This requirement will benefit investors by providing them with more information, with respect to issuers that have previously made a Regulation A offering, to consider when making an investment decision, facilitate the development of an efficient secondary market in such securities, and enhance our ability to analyze and observe the
Regulation A market. Second, issuers subject to orders by the Commission entered pursuant to Section 12(j) of the Exchange Act within a five-year period immediately preceding the filing of the offering statement will not be eligible to conduct an offering pursuant to Regulation A. This requirement will increase investor protection and compliment the exclusion of delinquent Regulation A filers discussed immediately above by excluding issuers with a demonstrated history of delinquent filings under the Exchange Act from the pool of eligible issuers under Regulation A.