A Canadian Perspective on the New U.S. Regulation A+ Exemption

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On December 18, 2013, the United States Securities and Exchange Commission (SEC) published for comment new rules for Regulation A (Regulation A+ or Reg A+).  Regulation A was originally implemented in 1933.  It exempts limited issuances of securities from registration under the United States Securities Act of 1933 (1933 Act) and its prospectus and registration statement requirements. Securities issued under a Regulation A offering are not “restricted securities” and therefore not subject to a hold period. Regulation A requires issuers prepare, file and deliver an offering document similar to an offering memorandum required under subsection 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions in Canada.  Regulation A is available to all private and public Canadian issuers not otherwise reporting issuers under the United States Securities Exchange Act of 1934 (1934 Act).  Issuers using this exemption can offer their securities to anyone residing in the United States where the Regulation A offering document has been qualified.

Regulation A, despite its ability to offer access to a wide group of investors, has not been popular among issuers.  There were 19 qualified Regulation A offerings from 2009 to 2012 raising an aggregate amount of $73 million. This amount represents less than 1% of the $25 billion raised during the same period by over 27,500 Regulation D offerings made under $5 Million.[1] Various factors have been identified as to why this exemption is not popular with issuers.  One factor is Regulation A is not cost effective as compared to other exemptions used to raise the same amount of money.  The cost of preparing, filing and clearing a Regulation A offering document is similar to that of preparing, filing and clearing a prospectus as both documents must be cleared by the SEC and each individual State regulator where the issuer intends to solicit investors.  Although there is a limited coordinated review process by State regulators, clearing a Regulation A offering document has historically been a costly and painful process.  State regulators can, and often do, add other requirements on issuers looking to qualify a Regulation A offering document such as escrow requirements on shares owned by management among other requirements.  In contrast, Regulation D offerings relying on Rule 506 pre-empt any State regulatory review and require only a simple subscription agreement and verification of an investor’s status as an accredited investor.

The maximum amount issuers can raise under Regulation A in a 12 month period is $5 million.  Many critics have claimed the amount is too low for the cost associated with the process.  It has been 32 years since the maximum amount that can be raised under Regulation A has been adjusted:

  • $100,000 – 1933;
  • $300,000 – 1945;
  • $500,000 – 1970;
  • $1,500,000 – May, 1978;
  • $2,000,000 – October, 1978; and
  • $5,000,000 – 1980.

Regulation A+ if adopted will move the amount that may be raised under the exemption to $50 million. Regulation A+ will have two tiers of offerings: Tier 1, for offerings of up to $5 million in a twelve-month period, and Tier 2, for offerings of up to $50 million in a twelve-month period. This new maximum cap will make Regulation A+ attractive to Canadian issuers looking to raise over $10 million in the United States.  A Canadian issuer may list its securities and become a reporting company in United States contemporaneous with undertaking a Regulation A+ type offering, or it may remain a non-reporting issuer even after it completes the Regulation A+ type offering. TSX Venture Exchange issuers in particular may find that Regulation A+ offers them a new route to raise capital and co-list on NASDAQ or NYSE-MKT.

To be eligible to use Regulation A+ an issuer:

  • must be organized and with their principal place of business, in the United States or Canada;
  • must not be an investment company or blank check company;
  • must not be issuing fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights;
  • must not be a reporting issuer under the 1934 Act;
  • must not have its securities suspended or revoked under the 1934 Act;
  • must not be disqualified under the “bad actor” disqualification rules; and
  • must have filed all Reg. A+ exempt distribution reports during the past two years.

Issuers may offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests, including any guarantees of such securities under Reg. A+.

Issuers relying on Regulation A+ to offer their securities must prepare a prescribed offering document.  This document must be reviewed and qualified by the SEC. Tier 2 Reg A+ offerings are pre-empted from State regulatory review. Tier 1 Reg A+ offerings must be reviewed by  each State securities regulator where the issuer intends to offer its securities.  Issuers raising $5 million or less have the option to claim they are conducting either a Tier 1 or Tier 2 Reg. A+ offering. Audited financial statements must be included in all Tier 2 Reg. A+ offering documents.  A Tier 1 Reg A+ offering document may include unaudited financial statements if audited financial statements are not otherwise available.

Tier 2 Regulation A+ offering are subject to a minimum of three years continuous disclosure obligations.  These disclosure obligations require issuers to file audited annual financial reports, unaudited semi-annual financial reports, current reports triggered by certain material events and an exit report.

The chart below summarizes the main requirements of Regulation A and Regulation A+.  This chart is based on the proposed Regulation A+ rules and forms published December 18, 2013 which are all subject to change.

 

Regulation A
Pre-Title IV Job’s Act

Regulation A+
Post-Title IV Job’s Act

 

 

Tier 1

Tier 2

12 Month Maximum Offering Amount

$5 Million

$5 Million

$50 Million

Public Solicitation

Yes

Yes

Yes

Test the Water Solicitation

Yes, file with SEC on or before the date of its first use. Solicitations of interest may not be made after filing offering statement. Sales may not occur until 20 calendar days after last solicitation of interest campaign. Must include  legend or disclaimer.

Yes, file with SEC on or before the date of its first use. Sales may not occur until 48 hours after delivery of offering statement. Must include legend or disclaimer.

Yes, file with SEC on or before the date of its first use. Sales may not occur until 48 hours after delivery of offering statement. Must include legend or disclaimer.

Restricted Securities

No

No

No

SEC Reviewed Offering Materials

Yes, Form 1-A Offering Statement and Circular

Paper Filing

Yes

Yes, Form 1-A Offering Statement and Circular

Electronic Filing

SEC Confidential Treatment

Allowed

Confidential pre-filing allowed if first filing

Confidential pre-filing allowed if first filing

Pre-Emption of State Review
(Federally Covered Security)

No

No

Yes

Qualification of Offering

Qualified without SEC action on the 20th calendar day after its filing, unless subject to review.

Qualified by order of SEC.

Qualified by order of SEC.

Financial Statements

Current balance sheet, and statements of income, cash flows, and stockholders’ equity for 2 year period as well as interim period. Financial statements of significant acquired businesses & related pro forma information. US GAAP.  Unaudited unless audited available. Regulation S-X not applicable but for   audit report, if applicable.

Balance sheet, statements of income, cash flows, and stockholders’ equity for 2 year period as well as interim period. Financial statements of significant acquired businesses & related pro forma information.US GAAP. Unaudited unless audited available. Regulation S-X not applicable but for audit report, if applicable, and for acquired business and subsidiaries.

Audited balance sheet, statements of income, cash flows, and stockholders’ equity for 2 year period. Unaudited interim period. Financial statements of significant   acquired businesses & related pro forma information. US GAAP. Regulation S-X for smaller reporting companies.

CDN’s may use US GAAP or IFRS.

Sales by Securityholders

Yes, up to $1.5 Million

Yes, up to $1.5 Million

Yes, up to $15 Million

Limitations on Investors

No

No

Purchase must be 10% or less of the greater of purchaser’s annual income or net worth.

Disqualification Provisions

Felon & bad actors disqualified per Rule 262 of 1933 Act.

Felon & bad actors disqualified per section 926 of Dodd-Frank Act.

Felon & bad actors disqualified per section 926 of Dodd-Frank Act.

Report of Sales & Use of Proceeds

Yes. Form 2-A to be filed  every 6 month after qualification and a final report within 30 days of last sale or use of proceeds.

Form 1-Z Exit Report must be filed within 30 calendar days from termination or completion of offering.

See ongoing reporting requirements.

Ongoing Reporting Requirements

None, unless  total assets exceed $10 million & more than 500 shareholders.

None,  unless total assets exceed $10 million & more than 500 shareholders.

  • Form 1-K   Annual Report
  • Form 1-SA   Semi-Annual Report
  • Form 1-U   Current Report
  • Form 1-Z Exit Report

Non-US Issuer Requirements

Must file Consent to Process on Form   F-X.

Reconciliation of CDN financial statements to US GAAP.

Must file Consent to Process on Form   F-X.

Reconciliation of CDN financial statements to US GAAP.

Must file Consent to Process on Form   F-X.

CDN issuer may present financial statements in US GAAP or IFRS.

Regulation A+, mandated by Title IV of the Job’s Act, has received less media attention in Canada than the SEC’s proposed equity crowdfunding rules under Title III of the Job’s Act.  Reg A+, however, holds much more potential for Canadian issuers looking to raise capital in the United States.  Title III equity crowdfunding in the United States is only available to issuers who are organized and actively conducting business in the United States. This rules out all Canadian issuers.  Reg A+ is open to private and public Canadian issuers who are not otherwise a reporting issuer under the 1934 Act.  Using Reg A+ in conjunction with a United States registered broker online funding portal, could open a huge potential investor pool to Canadian issuers.  This is a private placement exemption all small issuers in Canada should be watching and learning more about in the future.


Note:

  1. Page 10, SEC Release No. 33-9497, December 18, 2013, Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act.
Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter at @AlixeCormick or on Google+ at +AlixeCormick.
Summary
Article Name
A Canadian Perspective on the New U.S. Regulation A+ Exemption
Description
Regulation A+ is not just for U.S. issuers. Its' available to Canadian issuers too, including TSX Venture listed issuers. Issuers can also use it to list in Canada.
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Venture Law Corporation
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