The SEC voted unanimously this week to issue a proposed rule¹ under a mandate in Section 401 of the Jumpstart Our Business Startups Act that would exempt offerings of securities under Regulation A (up to $50 million annually) from the registration requirements of the Securities Act of 1933. The proposed rule specifies (1) which issuers are eligible for the exemption, (2) the content and filing requirements for issuers’ offering statements, and (3) issuers’ ongoing reporting requirements. 

Under Regulation A, a company is currently permitted to offer up to $5 million of securities in a 12-month period, and no more than $1.5 million of those securities may be offered by the company’s securityholders. The proposed rule would update and expand the exemption by creating two tiers of offerings under Regulation A:

• Tier 1 would consist of offerings that satisfy Regulation A’s current requirements (described above).
• Tier 2 would consist of securities offered of up to $50 million in a 12-month period with no more than $15 million offered by an issuer’s securityholders.

In addition, for offerings up to $5 million, the proposal would permit an issuer to offer its securities under either Tier 1 or 2. 

Under both tiers, companies would be subject to Regulation A’s current basic requirements, including those related to issuer eligibility and disclosures. However, the proposed rule updates Regulation A to allow issuers of Tier 1 offerings to submit draft offering statements for confidential SEC staff reviews. It would also give such issuers the ability to use “test-the-water” materials (before and after offering statements are filed) and would modernize the qualification, communications, and offering process, including requiring electronic filing of offering materials.

In addition to satisfying Tier 1 requirements, issuers of Tier 2 offerings would (1) need to file audited financial statements with their offering circular and (2) fulfill ongoing reporting obligations, including filing annual, semiannual, and current-event updates. The amount investors would be permitted to spend on Tier 2 offerings would be limited to no more than 10 percent of the greater of an investor’s annual income or net worth.

The proposed rule also describes types of issuers that would be ineligible to use Regulation A to offer their securities. For example, the exemption under Regulation A would not be available to companies that (1) are currently SEC-reporting companies or to those organized (or whose principal place of business is located) outside the United States or Canada, (2) have no specific business plan or purpose, or (3) are subject to disciplinary action by the SEC.

Comments on the proposed rule are due 60 days after its publication in the Federal Register.       

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1    SEC Proposed Rule Release No. 33-9497, Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act.