Tier 2
We are adopting the proposed $50 million Tier 2 offering limitation.92 Some commenters suggested that we raise the offering limitation to an amount above the statutory limitation set forth in Section 3(b)(2), but we do not believe an increase is warranted at this time. While Regulation A has existed as an exemption from registration for some time, today’s changes are significant. We believe that the final rules for Regulation A will provide for a meaningful addition to the existing capital formation options of smaller companies while maintaining important investor protections. We are concerned, however, about expanding the offering limitation of the exemption beyond the level directly contemplated in Section 3(b)(2) at the outset of the adoption of final rules. As noted above in Section II.B.1., the final rules do not limit issuer eligibility on the basis of issuer size, as we believe that the $50 million annual offering limitation will serve to
91 Rule 251(a)(1). We intend to revisit the Tier 1 offering limitation at the same time that we are required by Section 3(b)(5) of the Securities Act to review the Tier 2 offering limitation and will consider whether additional investor protections would be necessary if the Tier 1 offering limitation is increased.
92 Rule 251(a)(2).
limit the utility of the exemption for larger issuers in need of greater amounts of capital. Similarly, we believe that the more extensive disclosure requirements associated with Exchange Act reporting are more appropriate for larger and generally more complex issuers that raise money in the public capital markets.93 We are therefore concerned that an increase in the offering limitation at this time may increase risks to investors by encouraging larger issuers to conduct offerings pursuant to Regulation A in instances where disclosure pursuant to a registered offering under the Securities Act would be more appropriate.
The Commission is required by Section 401 of the JOBS Act to review the Section 3(b)(2) offering limitation every two years, and we will consider the use of the final rules by market participants as part of that review. We will therefore revisit the offering limitation by April 2016, as required by the statute, with a view to considering whether to increase the $50 million offering limitation. We also are adopting the proposed $15 million limitation on secondary sales for Tier 2 as proposed, with a change in the application of the limitation for secondary sales under both Tier 1 and Tier 2 discussed in the following section.
Application of the Limitation on Secondary Sales
As noted in the Proposing Release, secondary sales are an important part of Regulation A. We believe that allowing selling securityholders access to avenues for liquidity will encourage them to invest in companies, although we acknowledge that providing for secondary sales in any amount may give rise to certain concerns. As highlighted by at least one commenter at the pre-proposing stage, permitting some
93 See discussion in Section III.C.3. below.
secondary sales pursuant to Regulation A could place investors at an informational disadvantage to selling securityholders who have potentially greater access to inside information about the issuer and does not necessarily provide capital to the issuer.94 Other commenters stated that such concerns are misplaced in the context of secondary sales by non-affiliates, who generally do not have access to inside information.95
We do not believe that a wholesale prohibition on secondary sales, as suggested by some commenters, is appropriate or necessary for either Tier 1 or Tier 2 of Regulation A. However, in order to strike an appropriate balance between allowing selling securityholders continued access to avenues for liquidity in Regulation A and the concern that secondary offerings do not directly provide new capital to companies and could pose the potential risks to investors discussed above, the final rules continue to permit secondary sales but provide additional limitations on secondary sales in the first year. The final rules limit the amount of securities that selling securityholders can sell at the time of an issuer’s first Regulation A offering and within the following 12 months to no more than 30% of the aggregate offering price of a particular offering.96 While the final rules continue to provide selling securityholders with the flexibility to sell securities during this period, we believe that this approach to the final rules will help to ensure that secondary sales at the time of such offerings will be made in conjunction with capital raising events by the issuer.