Securities Act of 1993

New SEC Rule Will Offer Up to $60 Million

New SEC Rule to Reg. A Will Offer Up to $60 Million of Securities Annually

New amendments to Super Regulation A are being adopted by the Security and Exchange Commission, along with other new SEC rules and forms to implement Section 401 of the Jumpstart Our Business (JOBS) Act.

Section 401 of the JOBS Act also added Section 3(b)(2) to the Securities Act of 1993, which directions the Securities and Exchange Commission to adopt rules that exempt from the registration requirements of the Securities Act offerings of up to $60 million of securities annually.

The final new SEC rule of Super Regulation A include the following: issuer eligibility requirements, content and filing requirements for offering statements, along with ongoing reporting requirements for issuers in Regulation A offerings. These new SEC rules and form amendments will be effective as of June 19, 2015.

The U.S. Government Accountability office, or GAO, recently reviewed the SEC’s new rule on the amendments for small and additional issues exemptions under the Securities Act, also known as Regulation A. It found the following: the final rules adopt amendments to Regulation A and other rules and forms to implement section 401 of the JOBS Act; the final rules build on current Regulation A and preserve with some modifications, existing provisions regarding issuer eligibility, offering contents, testing the waters, and bad actor disqualifications; the final rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for certain Regulation A issuers; the rules contain certain additional requirements for Tier 2 offering (such as a requirement to include audited financial statements in the offering documents and to file annual, semiannual, and current reports with the SEC). The GAO also found that the SEC complied with applicable requirements in disseminating the rule.

In simpler terms, the proposed rules will create a two-tier system with easier requirements for small offerings (defined as up to $5 million annually) compared to stricter requirements for larger offerings (up to $60 million annually), while also modernizing the Regulation A filing process to be consistent with current practice for registered offerings. The key impact is that nonpublic issuers would be allowed to raise up to $60 million from non-accredited investors in a public offering. Regulation A offerings are public offerings with no prohibition on general solicitation and general advertising that are exempt from the filing requirements of the Securities Acts of 1933 and 1934. Currently, Regulation A permits unregistered public offerings of up to $5 million of securities in any 12-month period by non-SEC reporting U.S. and Canadian issuers. The Regulation A exemption requires issuers to file an offering statement, which is similar to abbreviated version of a prospectus in a registered offering, in paper format with the SEC.

For more information on Super Regulation A, or the new SEC rules, contact, Zachary O. Fallon, Special Counsel, Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3460; or Shehzad K. Niazi, Special Counsel, Office of Rulemaking, Division of Corporation Finance at (202) 551-3430, U.S. Securities and Exchange Commission, 100 F Street, NE, Washington. DC 20549-628.

Regulation D: Accredited Investors Only?

Registering with the Securities and Exchange Commission (SEC) often takes a lot of time and money that small businesses cannot afford to lose. Regulation D offers exemptions that let companies sell securities to accredited and non-accredited investors without going through the hassle of SEC registration. Before using Regulation D exemption rules, it is important to understand how they could affect your business.

The Basics of Regulation D

According to the Securities Act of 1933, individuals and businesses that sell securities have to either register with the SEC or meet an exemption. Regulation D outlines three rules that investors can use to avoid registration requirements. This lets qualifying companies sell securities without registering with the SEC. Companies that want to take advantage of Regulation D exemptions, however, must file the appropriate forms to ensure they are following rules and enter their information in the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.

The Three Exemption Rules of Regulation D

Regulation D has three rules that can exempt companies from SEC registration.

Rule 504

Rule 504 is useful for companies that only plan to sell $1,000,000 of securities within a 12-month period. Companies that meet this requirement can have as many investors as they want. They can also pay commissions and resale securities.

Rule 505

Rule 505 is useful for companies that sell $5,000,000 or less within a 12-month period. Companies that choose this exemption may sell securities to no more than 35 non-accredited investors. They can, however, sell to an unlimited number of Reg D accredited investors.

Rule 506

Rule 506 does not enforce financial limitations. Companies can, therefore, sell any amount of securities to investors. Like those using Rule 505 for exemption, companies using Rule 506 can only have up to 35 non-accredited investors. They can have an unlimited number of Regulation D accredited investors.

Rule 506 gives companies a little more responsibility when choosing investors. While they can sell to non-accredited investors, they must make sure that each investor meets a sophistication standard. The individual investor may meet this standard on his or her own, or by working in conjunction with a Purchaser Representative who understands the industry well.

Important Differences Between Reg D Exemption Rules

Financial restrictions are the most obvious differences between these three rules. If a company wants to sell more than $1,000,000 in securities, then it cannot claim the 504 exemption. 504, however, does let the company sell to an unlimited number of accredited investor Regulation D and non-accredited investors. The looser regulation makes sense within the industry because the company is working with relatively small amounts of money.

Rule 505 restricts security sales to $5,000,000 or less. It also prevents companies from using general solicitation and advertising to attract investors.

Rule 506 differentiates itself from 504 and 505 in two important ways. First, it doesn’t restrict the amount of securities that companies can sell. Second, it lets companies use general solicitation and advertising to attract investors. Rule 506 prevented general solicitation until the JOBS Act of 2012. According to Forces writer Cheryl Conner, this change to the Reg D program could add a trillion dollars of new funding to the industry.

Finding and Approaching Investors Without Breaking Reg D Rules

The exemption rule that a company uses can significantly influence how they find and approach investors. Any company that gets an exemption from Rule 504 or 505 will need to find investors privately without using an advertisement or anything that could be construed as general solicitation. That means they cannot advertise in newspapers, billboards, the Internet, or any other public forum.  

Companies that claim an exemption under Rule 506, however, can attract investors via any of these methods.

They can purchase a list of investors; create websites to collect leads; make billboards advertising their investment options; air commercials on TV; or use any number of advertising strategies that might attract more investors.

Once a potential investor contacts the company about buying securities, though, the company must make sure that the investor has a sophisticated understanding of the industry. This creates a kind of self-regulation that makes it harder for unscrupulous companies to take advantage of investors who don’t understand the risks and options when buying securities.

Reg D exemptions are extremely helpful to companies that want to sell securities. The exemption that you take should depend on your business’s specific needs.