The final rules explicitly allow for continuous or delayed offerings.994 As a result, it is now clear that eligible issuers have greater flexibility to select the timing of their offerings. Such flexibility is expected to benefit issuers by allowing them to adjust their capital raising based on macro-economic factors or company conditions.995 These factors should facilitate financing decisions and capital market efficiency. For example, existing research on Rule 415 offerings in the registered offering market shows that costs of intermediation in shelf offerings, and consequently the cost of raising equity through shelf registration, are lower than through traditional registration.996 The final rules condition the ability to sell securities in a continuous or delayed Tier 2 offering on being current with ongoing reporting requirements at the time of sale. This should not impose incremental costs on eligible issuers as they already file periodic updates and amendments.
The final rules restrict all “at the market” secondary offerings. Existing Regulation A prohibited primary “at the market” offerings, but did not necessarily restrict such offerings by selling securityholders. Some commenters suggested allowing such offerings, including primary offerings by the issuer.997 We recognize that not allowing
994 Existing Regulation A allows for continuous or delayed offerings to the extent permitted by Rule
415. Since Rule 415 only discusses “registered offerings,” the reference to it may have caused confusion as to the scope of its application in Regulation A offerings.
995 See Bayless, M., and S. Chaplinsky, 1996, Is there a window of opportunity for seasoned equity issuance? Journal of Finance 51(1), pp. 253–278.
996 See Bethel, J., and L. Krigman, 2008, Managing the cost of issuing common equity: The role of registration choice, Quarterly Journal of Finance and Accounting 47(4), pp. 57–85. We recognize that the evidence based on registered offerings may not be indicative of the effects on Regulation A offerings.
997 See OTC Markets Letter and Paul Hastings Letter.
secondary “at the market” offerings may limit flexibility for those issuers that are uncertain about the offering price that will attract sufficient investor demand. However, the benefit of the new restriction as it applies to secondary sales is that it helps ensure that issuers do not lose their Regulation A exemption due to unanticipated market factors by inadvertently offering securities in an amount that exceeds the offering limitation. Future offerings made in reliance on the final rules may provide more information to determine whether a robust market capable of supporting “at the market” offerings develops and whether the Regulation A exemption could be an appropriate method for such offerings in the future.
6. Nonpublic Review of Draft Offering Statements
Under the final rules, issuers whose securities have not been previously sold pursuant to a qualified offering statement under Regulation A or an effective registration statement under the Securities Act will be permitted to submit to the Commission a draft offering statement for non-public review, so long as all such documents are publicly filed not later than 21 calendar days before qualification. The option of non-public submission of a draft offering statement is expected to reduce the barriers to entry for issuers using Regulation A. In this regard, a potential issuer could reduce the amount of time between disclosing possibly sensitive information to its competitors in its offering statement and the related sale of its securities. Furthermore, companies that are tentative about conducting an offering could start the qualification process and then abandon the offering any time before the initial public filing without receiving the related stigma in the market. To the extent that this accommodation lowers the barriers to entry, it may encourage capital formation and competition. Moreover, we do not believe that the option of draft
offering statement submission will significantly affect investor protection. Disclosure requirements are unchanged for issuers that elect the option of non-public submission of draft offering statement. The initial non-public statement, all non-public statement amendments, and all correspondence with Commission staff regarding such submissions must be publicly filed and available on EDGAR as exhibits to the offering statement not less than 21 calendar days before qualification of the offering statement.
Solicitation of Interest (“Testing the Waters”)
Under existing Regulation A, testing the waters is permitted only until the offering statement is filed with the Commission, and solicitation material is required to be filed prior to or concurrent with first use. The final rules permit issuers to test the waters and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing information and disclaimers.998 Under the final rules, testing the waters materials will be required to be included as an exhibit to the offering statement at the time of initial submission or filing with the Commission, and updated thereafter.
In general, allowing issuers to gauge interest through expanded testing the waters will reduce uncertainty about whether an offering could be completed successfully.
Allowing solicitation prior to filing enables issuers to determine market interest in their securities before incurring the costs of preparing and filing an offering statement. If after testing the waters, the issuer is not confident that it will attract sufficient investor interest, the issuer can consider alternate methods of raising capital and thereby avoid the costs of
998 As noted in Section II.H.3. above, some state securities laws may impose limitations on the use of testing the waters by Tier 1 issuers.
an unsubscribed or under-subscribed offering. Allowing testing the waters at any time prior to qualification of the offering statement, rather than only prior to filing of the offering statement with the Commission, may increase the likelihood that the issuer will raise the desired amount of capital. This option may be useful for smaller issuers, especially early-stage issuers, first-time issuers, issuers in lines of business characterized by a considerable degree of uncertainty, and other issuers with a high degree of information asymmetry. This provision may attract certain issuers—those that may be uncertain about the prospects of raising investor capital—to consider using amended Regulation A when they might not otherwise, thus potentially promoting competition for investor capital as well as capital formation in the Regulation A market.
Expanding the permissible use of testing the waters communications could also increase the type and extent of information available to investors, which could lead to more efficient prices for the offered securities. The final rules permit testing the waters for an expanded period of time compared to the baseline. As a result, it may be easier for investors to become aware of a larger and more diverse set of investment opportunities in private offerings, which may allow these investors to more efficiently allocate their capital. The net effect could be to enhance both capital formation and allocative efficiency. Further, requiring issuers using testing the waters solicitations after the offering statement is publicly filed to provide the offering statement with the testing the waters materials (or provide information about where it can be accessed), and to update it and redistribute updates in the event of material changes, will allow investors to make informed investment decisions.
We recognize that there may also be potential costs associated with expanding the
use of testing the waters communications. If the contents of the offering circular differ substantively from the material distributed through testing the waters communications, and if investors rely on testing the waters materials, this may lead investors to make less informed investment decisions. Some commenters were concerned that the expanded use
of permissible testing the waters may facilitate misleading statements to investors and may lead to a heightened risk of fraud.999 We believe, however, that this potential investor protection concern is mitigated by the application of Section 12(a)(2) liability to Regulation A offerings and the general anti-fraud provisions of the federal securities
laws.