Scope of Exemption
Eligible Issuers
Consistent with the restrictions in existing Regulation A, the final rules exclude non-Canadian foreign issuers, investment companies (including BDCs), Exchange Act reporting companies, blank check companies, and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights, from relying on the exemption.
The final rules also exclude two additional categories of issuers: (i) issuers that are or have been subject to a denial, suspension, or revocation order by the Commission pursuant to Section 12(j) of the Exchange Act within the five years immediately preceding the filing of the offering statement, and (ii) issuers that are required to, but that
921 Based on an analysis performed by staff in the Division of Economic and Risk Analysis of Form D filings for calendar year 2014.
have not, filed with the Commission the ongoing reports required by the final rules during the two years immediately preceding the filing of an offering statement.
Excluding issuers that have not complied with Regulation A’s ongoing reporting requirements in the two-year period immediately preceding the filing of a new offering statement will incentivize issuers that intend to rely on amended Regulation A exemption in the future to comply with its ongoing reporting requirements. Similarly, excluding issuers that were subject to a denial, suspension, or revocation order by the Commission pursuant to Section 12(j) of the Exchange Act within the five years immediately preceding the filing of the offering statement will incentivize registrants to comply with their obligations under the Exchange Act, including their ongoing reporting obligations, and will prevent issuers with a history of non-compliance from relying on Regulation A after they terminate or suspend their Exchange Act reporting obligations. At the same time, neither of these exclusions should result in additional compliance costs for issuers because they do not impose any reporting or other requirements on issuers beyond those already mandated by existing regulations.
We recognize that excluding these additional categories of issuers would have an effect on capital formation as it could prevent Regulation A offerings by issuers who otherwise might have utilized the Regulation A exemption rather than other methods of capital raising. However, to the extent that the information contained in required past reports provides investors in follow-on offerings of Regulation A securities with a more complete picture of the issuer’s business and financial condition and is relevant for current investment decisions, the exclusion of issuers that are not compliant with Regulation A’s reporting requirements and issuers subject to an order by the Commission
pursuant to Section 12(j) should therefore enhance investor protection and the informational efficiency of prices of Regulation A securities by allowing investors to make better informed investment decisions. Moreover, we believe that these additional issuer eligibility requirements will complement each other in facilitating compliance with our rules.
To the extent that more issuers use the amended Regulation A exemption, the final rules may promote competition among eligible issuers in the market for investor capital and in the market for goods and services. The final rules may also promote competition in the product market between small issuers and larger issuers.
As suggested by some commenters, we could have expanded the categories of eligible Regulation A issuers to include non-Canadian foreign issuers,922 blank check companies,923 BDCs,924 and issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights.925 These alternatives could potentially enhance capital formation and competition.926
However, it may be potentially difficult and costly for investors, especially less sophisticated investors, to determine the valuation and risk of securities of non-Canadian foreign issuers, blank check companies and issuers of fractional undivided interests in oil
922 See ABA SIL Letter; Andreessen/Cowen Letter; BDO Letter; McCarter & English Letter; OTC Markets Letter; Richardson Patel Letter; SVB Letter; SVGS Letter.
923 See Gilman Law Letter; IPA Letter; Richardson Patel Letter.
924 See ABA BLS Letter; CFIRA Letter 1; Commonwealth Fund Letters 1 and 2; KVCF Letter; Milken Institute Letter; MoFo Letter; REISA Letter; SBIA Letter; WR Hambrecht + Co Letter. Most of these commenters noted that BDCs serve an important function in facilitating small or emerging business capital formation or in providing a bridge from private to public markets.
925 See REISA Letter.
926 If eligibility under amended Regulation A had been extended to investment companies and BDCs, and such companies obtained a lower cost of capital and passed savings through to the companies in which they invest, the latter could also realize indirect capital formation benefits.
or gas rights, or similar interests in other mineral rights, so extending eligibility to such issuers may also decrease investor protection. To the extent that such information asymmetries are not fully mitigated by initial and ongoing Regulation A disclosure requirements, which are generally less extensive than the disclosure requirements for registered offerings, the prices of Regulation A securities of these issuers could be less informationally efficient. Along the same lines, we believe the specialized nature of capital formation and investment strategies at BDCs warrants disclosures that are more specialized than what is required by existing or amended Regulation A for a proper understanding of an investment in the securities of these types of issuers.
We also could have expanded the categories of eligible Regulation A issuers to include issuers that are subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act (“reporting companies”), as suggested by some commenters.927 Although reporting companies sometimes conduct offerings exempt from registration, we are unable to estimate the number of reporting companies that would use the amended Regulation A exemption if it were made available to them. We recognize that some reporting companies may have benefited from this alternative due to, for example, the lower costs of preparation of a Regulation A offering statement than a registration statement.928 Additionally, some reporting companies whose securities are
927 Three commenters recommended allowing Exchange Act reporting companies that are current in their reporting obligations to conduct Tier 2 offerings. See Andreessen/Cowen Letter; BIO Letter; OTC Markets Letter. One of these three commenters limited its recommendation to companies with a non-affiliate float of less than $250 million. See BIO Letter. The other two commenters further commented that Exchange Act reporting should satisfy Regulation A reporting obligations if the Commission adopted their recommendation. See Andreessen/Cowen Letter and OTC Markets Letter.
928 According to one commenter, Form S-1 registration may be too costly for micro-cap companies, and the eligibility requirements of Form S-3 limit primary capital raising for issuers with a small
not listed on a national securities exchange could potentially benefit from savings of time and dollar expenditures that may result from the state securities law preemption in Tier 2 offerings. However, because Exchange Act disclosure requirements for reporting companies are more extensive than those under amended Regulation A, reporting companies would not be able to derive the benefit of reduced ongoing reporting costs under amended Regulation A. Other commenters suggested imposing more restrictive
issuer eligibility criteria, by excluding issuers that are not “operating companies”929 or
excluding shell companies and issuers of penny stock.930 While these additional exclusions may create some investor protection benefits, such additional exclusions would be likely to limit capital formation and competition among small issuers, which are more likely to fall into the penny stock category, or some early-stage companies, which may not meet the definition of an “operating company.” Overall, due to 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, we believe that it is prudent to defer consideration of potential changes to the categories of eligible issuers until we have the opportunity to observe the use of the amended Regulation A exemption and assess any new market practices as they develop.