Regulation A.181
Treatment under Section 12(g)
Proposed Rules
Exchange Act Section 12(g) requires, among other things, that an issuer with total assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the Commission.182 We did not propose to exempt Regulation A securities from mandatory registration under Section 12(g), but we solicited comment on whether Regulation A securities should be granted such an exemption, either conditionally or otherwise.
Comments on Proposed Rules
Commenters generally expressed support for some form of exemption from the registration requirements under Section 12(g). Numerous commenters recommended
180 For a concurrent offering under Rule 506(b), an issuer will have to conclude that purchasers in the Rule 506(b) offering were not solicited by means of a Regulation A general solicitation. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the Regulation A offering may preclude reliance on Rule 506(b). See also Rel. No. 33-8828 (Aug. 3, 2007) [72 FR 45116].
181 See discussion in Section II.D. below.
182 15 U.S.C. 78l(g).
exempting Regulation A securities from Section 12(g).183 Several of these commenters expressed concern that the Section 12(g) record holder count would decrease the utility of the Regulation A exemption by incentivizing issuers to sell to accredited investors over non-accredited investors, likely resulting in issuers electing to rely on a potentially less costly exemption, such as Rule 506 of Regulation D.184 These commenters also expressed concern that Section 12(g) would decrease the utility of the exemption because secondary trading in otherwise unrestricted Regulation A securities might result in issuers inadvertently crossing the Section 12(g) registration threshold.185 Other commenters questioned the extent to which Regulation A securities would be held in street name through brokers, which the proposal mentions as a factor that could potentially limit the impact of not proposing an exemption from Section 12(g).186 Some commenters suggested that the reporting regime under Tier 2 would be a sufficient means by which issuers could provide investors with current information and that therefore Exchange Act
183 B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Letter from Jonathan Frutkin, Principal, The Frutkin Law Firm, PLC, March 24, 2014 (“Frutkin Law Letter”); Guzik Letter 1; Letter from Samuel S Guzik, October 25, 2014 (“Guzik Letter 2”); Heritage Letter; IPA Letter; Ladd Letter 2; Milken Institute Letter; MoFo Letter; SBIA Letter (recommending that the trigger be “raised or remedied,” but not explicitly calling for elimination); US Alliance Corp. Letter; U.S. Chamber of Commerce Letter; WR Hambrecht + Co Letter.
184 CFIRA Letter 1; Fallbrook Technologies Letter; Frutkin Law Letter; Heritage Letter; IPA Letter; Milken Institute Letter; MoFo Letter; SBIA Letter; U.S. Chamber of Commerce Letter.
185 Id.
186 Guzik Letter 1 (noting the statements of other commenters); Heritage Letter; Ladd Letter 2 (citing discussions with various brokers); MoFo Letter; SBIA Letter; WR Hambrecht + Co Letter; see also OTC Markets Letter (highlighting difficulties associated with issuer securities becoming eligible for Depository Trust Company (DTC) services, which services typically limit the number of an issuer’s record holders thereby minimizing the impact of the Section 12(g) mandatory registration provisions; further suggesting that companies issuing Regulation A securities be required to use registered transfer agents).
reporting would be unnecessary.187 Two commenters believed that the legislative history of the JOBS Act supported an exemption from Section 12(g).188
Several commenters recommended changing, delaying, or conditioning the application of Section 12(g)’s registration requirements, especially the corresponding Section 13 reporting obligations that come with registration.189 One of these commenters recommended delaying the application of Exchange Act reporting requirements for Tier 2 issuers until the issuer’s non-affiliate market capitalization reached $250 million, so long as the issuer filed reports under Regulation A.190 This commenter believed that
non-affiliate market capitalization was a superior proxy for market interest than the thresholds under Section 12(g) and noted that the Commission uses the measure in establishing primary S-3 eligibility. Another commenter recommended exempting initial Tier 2 issuers from all or part of Exchange Act reporting obligations until the earliest of the occurrence of several events.191 Yet another commenter suggested exempting Tier 2 issuers from Exchange Act reporting until they reach a certain unspecified level of revenue or market capitalization.192 Two commenters recommended deeming Tier 2 issuers’ ongoing reports under Regulation A to satisfy the issuer’s Exchange Act
187 B. Riley Letter; Fallbrook Technologies Letter; Milken Institute Letter; MoFo Letter.
188 Ladd Letter 2; WR Hambrecht + Co Letter.
189 Heritage Letter; KVCF Letter; McCarter & English Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; SBIA Letter.
190 Paul Hastings Letter.
191 McCarter & English Letter (suggesting the earliest of: (1) the last day of any fiscal year of the issuer during which it had annual gross revenues of $250 million; (2) the last day of any fiscal year following the fifth anniversary of the date of the first sale of equity securities under Regulation A; and (3) the date on which the issuer has an aggregate worldwide market value of voting and non-voting equity held by its non-affiliates of at least $75 million computed as of the last business day of the issuer’s most recently completed second quarter).
192 Milken Institute Letter.
reporting obligations for a phase-in period.193 One commenter recommended at least allowing for 2,000 holders of record (whether accredited or not) without being subject to Exchange Act registration requirements,194 while two other commenters suggested eliminating the cap of 500 non-accredited investors.195 One commenter conditioned its support for a conditional exemption from Section 12(g) on the Commission requiring Tier 2 issuers to remain current in their ongoing Regulation A reporting requirements.196