Resource Guide: SEC Regulation A + Plus

Eligible Securities

Consistent with the statute, the final rules apply to offerings of equity securities, debt securities, and securities convertible or exchangeable to equity interests, for

public float. See Andreessen/Cowen Letter. But see earlier discussion of indirect costs of issuance for issuers using scaled disclosures in Section III.B.1.b.
929 See CFIRA Letter 1 and WR Hambrecht + Co Letter.
930 See ABA BLS Letter and MoFo Letter.
example, warrants, including any guarantees of such securities.931

Similar to the proposal, the final rules exclude offerings of asset-backed securities (“ABS”) from eligibility for Regulation A. As discussed above, we believe that ABS issuers are not the intended beneficiaries of the mandated expansion of Regulation A. ABS are subject to the provisions of Regulation AB and other rules specifically tailored to the offering process, disclosure and reporting requirements for such securities, and we do not believe that Regulation A’s requirements are suitable for offerings of such securities. ABS are designed to pool the risk of already-issued loans and other financial assets and, in this respect, do not constitute new capital formation. We recognize that, in certain cases, permitting ABS offerings to be conducted under Regulation A could lower the cost of capital for underlying borrowers whose loans are eventually securitized by ABS issuers and therefore indirectly facilitate capital formation.932 In practice, however, the vast majority of ABS offerings are much larger than the maximum allowable offering size under amended Regulation A.933 As a result, we believe that excluding ABS offerings from eligibility for Regulation A likely will not have a significant adverse effect on capital formation.
Offering Limitations and Secondary Sales‌

931 See discussion in Section II.B.2 above.
932 This indirect effect may result because, due to bank accounting standards and capital requirements, securitization allows originators to move assets off the balance sheet, freeing up capital for additional loans. The resulting increase in capital available for lending could lead to lower borrowing costs for all borrowers down the capital supply chain. See Pennacchi, G., 1995, Loan sales and the cost of bank capital, Journal of Finance 43(2), pp. 375–396; Carlstrom, C., and
Samolyk, 1995, Loan sales as a response to market-based capital constraints, Journal of Banking and Finance 19(3), pp. 627–646.
933 Our analysis indicates that from 2011–2013, approximately 2.9% of ABS issuances were below
$50 million. This estimate uses the AB Alert and CM Alert databases and includes only private label ABS deals.
Offering Limitations

As explained above, the final rules introduce two tiers of offerings compared with the baseline of one tier in existing Regulation A. The tiered approach in the final rules allows us to scale regulatory requirements based on offering size, to give issuers more flexibility in raising capital under Regulation A, and to provide appropriately tailored protections for investors in each tier. Issuers seeking to raise a larger amount of capital are, among other things, required to provide more extensive initial and ongoing disclosures, but are also able to take advantage of the larger maximum offering size in Tier 2 (up to $50 million in a twelve-month period). In light of this larger maximum offering size, the final rules impose additional disclosure requirements and other provisions to provide protection to investors in Tier 2 offerings. Issuers seeking a smaller amount of capital retain the advantage of more scaled disclosures required in Tier 1 offerings but must comply with a lower offering size limit.
We recognize that the cost associated with greater disclosure requirements for offerings made under Tier 2 in amounts up to $20 million may place Tier 2 issuers at a relative competitive disadvantage as compared to issuers seeking to raise an amount below $20 million in a Tier 1 offering. Such potential competitive effects are likely to be mitigated by the ability of issuers to evaluate the trade-off between the costs associated with more extensive disclosure requirements for Tier 2 offerings and the benefit of a potentially higher securities valuation stemming from a reduction in information asymmetry between issuers and investors due to the more extensive disclosure requirements for Tier 2 offerings.
In a change from the proposal, and in line with the suggestions of some
commenters, the final rules raise the Tier 1 maximum offering size from $5 million to

$20 million in a twelve-month period in order to provide smaller issuers with additional flexibility to meet their financing needs.934 We expect the higher Tier 1 maximum offering size will facilitate capital formation under Regulation A for those issuers seeking to raise between $5 and $20 million in a twelve-month period. We expect the resulting capital formation benefits to be greater for smaller issuers for which the incremental costs of the Tier 2 disclosure regime—relative to the costs of complying with state registration—exceed the benefits of more extensive disclosure.
Compared to the baseline, the increase in the maximum offering size to
$20 million for Tier 1 offerings and the creation of Tier 2 with the maximum offering size of $50 million will provide issuers with increased flexibility with regard to their offering size and should lower the burden of fixed costs associated with conducting Regulation A offerings as a percentage of proceeds.935 This could make amended Regulation A more cost effective and attractive to issuers than existing Regulation A, resulting in potential favorable effects on capital formation and competition. The increase in the maximum offering size could also make Regulation A attractive to a broader range of issuers, including larger issuers. This could provide investors with a broader range of investment opportunities in the Regulation A market and potentially result in a more efficient allocation of investor capital.

The increased maximum offering size could also contribute to improved liquidity

934 Some commenters recommended raising the Tier 1 offering limitation to $10 million or more. See
Guzik Letter 1 and ICBA Letter.
935 To the extent that issuers in Tier 2 offerings face additional costs due to revised disclosure requirements under amended Regulation A, issuance costs as a percentage of proceeds may remain unchanged or may increase.
for Regulation A securities, to the extent that larger issues may encourage greater breadth of equity ownership, assuming sufficient secondary market demand develops.936 Improved liquidity would enable investors in Regulation A offerings to unwind their investments more easily and at a lower cost, thus making such investments more attractive to potential investors. On the other hand, if investor demand for securities offered under amended Regulation A is low, this could negatively affect security prices and liquidity.
If investor demand for Regulation A securities and information about issuers is sufficient, the increase in maximum offering size could also contribute to the development of intermediation services, such as market making, and to the coverage of Regulation A securities by analysts.937 It is possible that an underwriting market may develop to provide Regulation A offering services, especially in larger Tier 2 offerings. The presence of these services could have a positive impact on investor participation and aftermarket liquidity of Regulation A securities, further increasing demand for such services. It is also possible, however, that investor demand for Regulation A securities will not expand sufficiently to make such services economically feasible.
Finally, the increase in the maximum offering size could result in increased

936 We recognize the possibility that, despite the absence of resale restrictions, even large Regulation A offerings with heavy investor participation may fail to attain sufficient liquidity due to a lack of secondary trading and a lack of breadth of institutional ownership, and thus may be associated with a higher cost of capital due to the illiquidity premium. In such a scenario, some issuers and investors may still benefit from having access to a type of offering that provides greater liquidity than Regulation D securities offerings although less liquidity than registered offerings of securities listed on major national exchanges.
937 Academic studies show that firm size is an important predictor of analyst coverage, so if larger issuers are attracted to the Regulation A market, they may be more likely to be covered by analysts than smaller issuers, all else equal. See Barth, M., R. Kasznik, and M. McNichols, 2001, Analyst coverage and intangible assets, Journal of Accounting Research 39(1), pp. 1–34.
competition among Regulation A issuers for investor capital. If the number of issuers seeking to raise larger amounts of capital pursuant to Regulation A increases more than the size of the accredited and non-accredited investor base, investors considering Regulation A securities will have more choice of investment opportunities in the Regulation A market, resulting in greater competition among issuers for prospective investors. Increased competition, in turn, could result in more efficient allocation of capital by investors. The intensity of competition among issuers for investor capital may not change, however, if issuers are able to attract additional numbers of accredited and non-accredited investors as the Regulation A market develops.
Alternatively, as suggested by some commenters, we could have increased the Tier 2 maximum offering size above $50 million, for example, to $75 or $100 million.938 This alternative could result in benefits that are similar to the benefits of the increase in the maximum offering size contained in the final rules but of a potentially larger magnitude. However, there is reason to believe that the magnitude of the increase in such benefits may be limited. In particular, although Rule 506 does not limit maximum offering size, few Regulation D offerings by issuers that would be eligible for amended Regulation A exceeded $50 million.939 To the extent that the current use of other types

938 See B. Riley Letter; Fallbrook Technologies Letter; OTC Markets Letter; Public Startup Co. Letter 1; Richardson Patel Letter.
939 Based on an analysis of Form D filings for 2014 by staff from Commission’s Division of Economic and Risk Analysis, less than 3% of Regulation D offerings by issuers that would be eligible for amended Regulation A had offering size greater than $50 million.
We also considered the overall distribution of registered offerings (initial public offerings and seasoned equity offerings). The overall number of Regulation D offerings significantly exceeded the number of registered equity offerings, thus the combined distribution of registered and Regulation D offerings closely resembles the distribution of Regulation D offerings. In 2014, most (92.2%) of the offerings conducted in the form of registered equity offerings or Regulation D offerings had offer sizes up to $50 million. In 2014, offerings in the $50-$75 million range accounted for 1.0% of Regulation D offerings and approximately 10% of registered equity
of exempt offerings is indicative of future Regulation A offerings, the alternative of raising the Tier 2 offering size above $50 million may not lead to a significant increase in the number of issuers.
However, we recognize that historical use of Regulation D may not fully represent future potential use of Regulation A, particularly to the extent that the amended rules facilitate offerings by issuers that do not currently rely on other private offering exemptions and that are seeking a broader investor base and enhanced liquidity for their issued securities. In particular, amended Regulation A may attract issuers seeking a public ownership status, and for whom a likely alternative is a registered offering. An increase in the Tier 2 offering size above $50 million could result in some issuers shifting from conducting a registered offering to conducting a Tier 2 offering. As discussed earlier, amended Regulation A may facilitate offerings that would not otherwise be conducted given the cost of registered offerings. However, it is also possible that an increase in the Tier 2 offering size above $50 million will not result in a significant number of issuers shifting from conducting a registered offering to conducting a Tier 2 offering given that the relative cost savings from a Tier 2 offering compared to a
registered offering may be lower for offerings in the $50 million to $75 million range than for those below $50 million.940

offerings. Data on registered offerings was obtained from Thomson Reuters, as described in Section III.B.1.b.
940 The fixed costs of registered offerings represent a significantly higher portion of offering proceeds as offering sizes decrease. For instance, compliance related costs (registration, legal and accounting expenses and fees) increase from an average of an average of 1.7% for IPOs and 0.5% for SEOs in the $50-$75 million range to an average of 2.9% for IPOs and 1.6% for SEOs in the below $50 million range. Fee information is compiled from Thomson Reuters SDC data for 1992– 2014, excluding offerings from non-Canadian foreign issuers, blank-check companies, and investment companies. Average compliance fees and expenses for this calculation are based on observations with non-missing data (where all four types of fees – legal, accounting, blue sky, and
An increased maximum offering size for Tier 1 offerings could increase the overall amount of securities being offered to the general public that are subject to less extensive initial disclosure requirements and not subject to ongoing disclosure requirements, which may reduce the ability of investors to make informed investment decisions. However, some issuers that conduct offerings that are eligible for Tier 1 may instead choose a Tier 2 offering, for example, to take advantage of the benefits of more extensive disclosure, such as potentially greater secondary market liquidity, and the benefits of a single level of regulatory review.
An increased maximum offering size for Tier 2 Regulation A offerings could increase the overall amount of securities being offered to the general public that are subject to initial and ongoing disclosure requirements that are less extensive than the requirements for registered offerings being offered to the general public, which may result in less informed decisions by investors, thus potentially impacting investor protection. This may be partly mitigated by the investment limitations imposed on non-accredited investors in Tier 2 offerings. Further, larger issuers are more likely to
conduct registered offerings, associated with the more extensive disclosure requirements of the Exchange Act.941 We believe that the annual offering limitation for Tier 2 will

registration fees, to which we collectively refer as compliance fees – are separately reported). Offerings with gross proceeds below $1,000 are excluded to minimize measurement error.
941 Early in the firm’s life cycle, it may be optimal for a firm to remain private, but as it grows larger, it may become optimal to conduct a registered IPO. See Chemmanur, Thomas J., and Paolo Fulghieri, 1999, A theory of the going-public decision, Review of Financial Studies 12(2), pp.
249–279. Privately held firms tend to be significantly smaller than firms with publicly traded securities. See Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist, 2014, Corporate investment and stock market listing: A puzzle? Review of Financial Studies 28(2), pp. 342–390. Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist, 2011, What do private firms look like? Data appendix, available at: http://ssrn.com/abstract_id=1659926. Other studies support the notion that larger firms are more likely to conduct a registered IPO. See Pagano, Marco, Fabio Panetta, and Luigi Zingales, 1998, Why do computers go public? An empirical analysis, Journal of
serve to limit the utility of the Regulation A exemption for larger issuers and thus will make it more likely that they will continue to raise money through registered offerings and provide the corresponding disclosure.
Secondary Sales
The final rules continue to permit secondary sales as part of a Regulation A offering, subject to the following conditions. The amount of securities that selling securityholders can sell at the time of an issuer’s initial offering and within the following 12-month period may not exceed 30% of the aggregate offering price (offering size) of a particular offering. Following the expiration of the first 12-month period after an issuer’s initial qualification of an offering statement, the amount of securities that affiliate securityholders can sell in a Regulation A offering in any 12-month period will be limited to $6 million in Tier 1 offerings and $15 million in Tier 2 offerings.942 After the initial 12-month period, sales by non-affiliate securityholders made pursuant to the offering statement will not be subject to a limit on secondary sales but will be aggregated with sales by the issuer and affiliates for the purposes of compliance with the maximum offering limitation for the respective tier. The final rules also eliminate the provision in the current Rule 251(b), which prohibits resales by affiliates unless the issuer has had net

Finance 53, 27–64 (showing that size predicts going public using Italian data). See also Chemmanur, Thomas J., Shan He, and Debarshi K. Nandy, 2010, The going-public decision and the product market, Review of Financial Studies 23(5), pp. 1855–1908 (showing that size predicts a higher likelihood of conducting a registered IPO using US data). In turn, smaller firms that have undertaken an IPO in the past are more likely to go private later on. See Mehran, Hamid, and Stavros Peristiani, 2010, Financial visibility and the decision to go private, Review of Financial Studies, 23(2), pp. 519–547.
942 The dollar limits are broadly consistent with existing Regulation A, which limits sales by existing securityholders to $1.5 million, or 30% of the $5 million maximum offering size, in a 12-month period.
income from continuing operations in at least one of the last two years.943
Several commenters recommended eliminating limits on sales by existing securityholders,944 including one commenter that recommended eliminating restrictions on sales by non-affiliate securityholders since concerns over information asymmetries between potential investors and non-affiliate securityholders would be reduced.945 Other commenters recommended either proscribing resales entirely946 or requiring the approval of the resale offering by a majority of the issuer’s independent directors upon a finding that the offering is in the best interests of both the selling securityholders and the issuer.947 Another commenter recommended requiring a twelve-month holding period for selling shareholders in order to distinguish between investors seeking to invest in a business and investors simply seeking to sell to the public for a gain or limiting securityholders not qualifying for the twelve-month holding period to selling a fraction of their shares, such as 50%.948

Whether and to what extent securityholders should be permitted to sell in a Regulation A offering involves a trade-off between enhancing liquidity for selling securityholders and limiting the potential harm to investors that could arise from such sales. The final rules attempt to balance these considerations. The trade-off between

943 Tier 1 offerings may still be subject to state law limitations on secondary sales and sales by affiliates.
944 See ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; CFIRA Letter 2; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter.
945 See Milken Institute Letter.
946 See Massachusetts Letter 2; NASAA Letter 2; Carey Letter.
947 See NASAA Letter 2 (supporting the proposed limits coupled with a board approval requirement in lieu of prohibiting resales entirely) and WDFI Letter (not expressing a preference for prohibiting resales entirely).
948 See MCS Letter.
these countervailing considerations will depend in large part on whether the selling securityholder is an affiliate of the issuer. There are two concerns about sales by affiliates. One is that there is an information asymmetry between an affiliate and outside investors. In particular, an affiliate selling securityholder is likely to have an
informational advantage that it may potentially utilize to the detriment of outside investors.949 The other concern is the alignment of incentives. With respect to affiliates, it is often argued that the incentives of company management are better aligned with other shareholders when managers hold a significant equity interest in the company.950 Thus, it can be important that insiders retain an ownership stake in the company to ensure that their incentives are aligned.951 A divestiture of the ownership stake of an affiliate owner may therefore exacerbate agency conflicts, thus suggesting that large affiliate sales
can be detrimental to current and future investors.

We recognize, however, that there are benefits to be realized from permitting affiliate securityholders, such as company founders and employees, to sell in a Regulation A offering. Because entrepreneurs and other affiliates consider available exit options before participating in a new venture, permitting secondary sales increases their incentives to make the original investment, which may promote innovation and business

949 See Easley, D., and M. O’Hara, 2004, Information and the cost of capital, Journal of
Finance 59(4), pp. 1553–1583. We note that these potential effects may be limited to the extent that purchasers are aware that they may be transacting with better informed affiliates in the course of offerings with affiliate securityholder sale disclosures, in which case these informational asymmetries could be partially or fully reflected in lower security prices and lower proceeds at the time of the offering.
950 See Jensen, M., and W. Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3(4), pp. 305–360.
951 See Core, J., R. Holthausen, and D. Larcker, 1999, Corporate governance, chief executive officer compensation, and firm performance, Journal of Financial Economics 51(3), pp. 371–406; Mehran, H., 1995, Executive compensation structure, ownership, and firm performance, Journal of Financial Economics 38(2), pp. 163–184.
formation.952 Allowing exit could also facilitate efficient reallocation of capital and talents of entrepreneurs to new ventures.953 Additionally, exit of a large affiliate shareholder could potentially result in a broader base of investors.
As noted above, the final rules relax the existing limitations on secondary sales by affiliates by eliminating the net income test for affiliate resales in existing Rule 251(b).
We are concerned that this criterion may not be the best measure of financial health and investment opportunities for some issuers eligible for amended Regulation A and thus may inappropriately disadvantage those issuers, and their affiliates, with respect to secondary sales.954 In particular, this change should benefit growth and R&D-intensive issuers that may experience longer periods of negative revenues. Several commenters supported the elimination of the net income test for affiliate resales, generally noting that some issuers may have net losses for several years, including due to high R&D costs.955 We recognize that eliminating this criterion could lead to reduced investor protection due to insiders in Regulation A offerings being able to sell securities in issuers that have not reported net income. However, we note that the disclosures required for Regulation A offerings, as well as the overall limits on secondary sales during the initial 12-month

952 See Cumming, D., and J. MacIntosh, 2003, Venture-capital exits in Canada and the United States, University of Toronto Law Journal 53(2), pp. 101–199.
953 See Zhang, J., 2011, The advantage of experienced start-up founders in venture capital acquisition: Evidence from serial entrepreneurs, Small Business Economics 36(2), pp. 187–208. See also Gompers, P., A. Kovner, J. Lerner, and D. Scharfstein, 2006, Skill vs. luck in entrepreneurship and venture capital: Evidence from serial entrepreneurs, Working paper No. w12592, National Bureau of Economic Research.
954 See Davila, A., and G. Foster, 2005, Management accounting systems adoption decisions: Evidence and performance implications from early-stage/startup companies, Accounting Review 80(4), pp. 1039–1068 (suggesting that standard accounting measures are often poor indicators of financial health in small companies).
955 See ABA BLS Letter; B. Riley Letter; Canaccord Letter; CFIRA Letter 1; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter.
period and subsequent limits on secondary sales by affiliates, should partly mitigate this cost.
The trade-off between enhanced liquidity and investor protection is different with respect to sales by non-affiliates, because these securityholders are less likely to have access to inside information, and their sales do not raise the incentive alignment concerns discussed above in the context of affiliate securityholders. The option to exit through a Regulation A offering provides additional liquidity to existing non-affiliate securityholders. During the initial 12-month period, the final rules enable selling securityholders to access liquidity through a Regulation A offering while ensuring that secondary sales at the time of such offerings are made in conjunction with new capital raising by the issuer. After the expiration of the initial 12-month period, the ability of non-affiliate securityholders to sell securities pursuant to a qualified Regulation A offering statement without limitation (except the maximum Regulation A offering size) should make Regulation A securities more attractive to prospective investors, which may encourage initial investment and increase capital formation. Non-affiliate securityholders who hold restricted securities purchased in reliance on another exemption will be able to sell them freely after a one-year holding period. Purchasers of the securities from such non-affiliate securityholders would not have the benefit of the more robust disclosure provisions of a Regulation A offering, where the seller will be subject to Section 12(a)(2) liability. Thus, allowing secondary sales in a Regulation A offering will provide an additional measure of protection for purchasers as compared to transactions in the
secondary market.956 Consequently, we believe that removing restrictions on non-affiliate securityholder sales in Regulation A offerings will not have an adverse effect on investor protection.
Although secondary sales increase the liquidity for existing securityholders, since secondary sales will be aggregated with issuer sales for purposes of compliance with the maximum offering amount permissible under the respective tiers, secondary sales may reduce the maximum amount of issuer sales in a Regulation A offering. The 30% limit on secondary sales imposed during the initial 12-month period partly mitigates this potential effect.