Termination and Suspension of Reporting and Exit Reports
The final rules permit issuers in Tier 2 offerings that have filed all periodic and current reports required by Regulation A for a specified period to suspend their ongoing reporting obligation under Regulation A at any time after completing reporting for the fiscal year in which the offering statement was qualified, if the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and offers or sales made in reliance on a qualified Tier 2 offering statement are not ongoing. For banks or bank holding companies, the termination threshold is fewer than 1,200 persons, consistent with Title VI of the JOBS Act. The option to cease reporting could be beneficial, especially for issuers that do not seek secondary market liquidity and for smaller issuers that find the costs of compliance with the ongoing disclosure requirements to be a relatively greater burden. At the same time, the option might be costly for investors because it will decrease the amount of information available about the issuer, making it more difficult to monitor the issuer and accurately price its securities or to find a trading venue that will allow liquidation of the investment. The public availability of information in bank regulatory filings is expected to mitigate some of these effects for bank issuers undertaking Regulation A offerings. Termination of reporting also might
make it easier for inside shareholders to use an informational advantage to the detriment of minority outside investors.
The final rules require Tier 1 issuers to notify the Commission upon completion of their offerings by filing Form 1-Z (exit report). Issuers in Tier 2 offerings will be required to provide this information on Form 1-Z at the time of filing the exit report, if they have not previously provided this information on Form 1-K as part of their annual report. Form 1-Z contains limited summary information about the issuer and the completed offering and, therefore, should not impose substantial additional compliance
costs on the issuer.1016 The enhanced availability of Form 1-Z information is likely to
benefit investors and facilitate evaluation of Regulation A market activity. For example, this information should allow the Commission and others to assess whether issuers have been able to raise the projected amount of capital in Regulation A offerings. We recognize, however, that, since information about the completed offering has value to an issuer’s competitors, its disclosure may also impose an indirect cost on issuers.
Exchange Act Registration
Generally, an issuer of Regulation A securities would not be subject to Exchange Act reporting obligations unless it separately registers a class of securities under Section 12 of the Exchange Act or conducts a registered public offering. This results in significantly lower costs of periodic reporting for Regulation A issuers relative to reporting companies.1017
1016 For the purposes of the PRA, we estimate that filing the Form 1-Z exit report will result in an aggregate annual burden of 235.5 hours of in-house personnel time. See Section IV below.
1017 Ongoing compliance costs were estimated to be $1.5 million per year, following an IPO, according to two surveys cited in the IPO Task Force report.
The final rules permit issuers seeking to register a class of Regulation A securities under the Exchange Act to do so by filing a Form 8-A in conjunction with the qualification of a Form 1-A that follows Part I of Form S-1 or the Form S-11 disclosure model in the offering circular. In some circumstances this option may provide more flexibility, for instance, with respect to testing the waters, to issuers seeking to register a class of securities. The obligation to file ongoing reports in a Tier 2 offering is automatically suspended upon registration of a class of securities under Section 12 of the Exchange Act or registration of an offering of securities under the Securities Act. Given that Exchange Act reporting obligations are more extensive than those of Regulation A, the entry of such issuers into the Exchange Act reporting system upon qualification of a Regulation A offering statement is expected to have a beneficial effect on investor protection and informational efficiency of prices. While registration pursuant to the Exchange Act is likely to impose additional costs on issuers, only issuers that opt into such registration are affected. As a result, we anticipate that only those issuers for whom the perceived benefits of registration justify the accompanying costs will elect to use this provision.
Insignificant Deviations
Under the final rules, offerings with “certain insignificant deviations from a term, condition or requirement” of Regulation A remain exempt from registration. This is the same as the rules in existing Regulation A. As a result, the only change from the baseline is that these rules will likely apply to a greater number of offerings due to the expanded availability of amended Regulation A. Further, as in existing Regulation A, the final rules explicitly classify as significant those deviations that are related to issuer eligibility,
aggregate offering price, offers and continuous or delayed offerings. This provision benefits investors by providing certainty about the provisions from which the issuer may not deviate without losing the exemption. At the same time, it enables issuers to continue to rely on the exemption and obtain its capital formation benefits even if they have an “insignificant deviation” from the final rules. This provision may be especially beneficial for issuers with limited experience with Regulation A offerings as their limited experience may make them more susceptible to an inadvertent error. In this way, the provision may encourage more issuers to engage in Regulation A transactions and thereby facilitate capital formation.
Bad Actor Disqualification