“JOBS” Act Creates Another Venue for Raising Capital
Shumaker Williams, P.C. Securities Law Practice Group
Companies, including bank holding companies, looking to raise capital through the sale of securities, must either register the securities with the Securities and Exchange Commission (the “SEC”) or rely on an exemption from registration. In some instances, the securities laws of the states in which the securities are offered are also triggered.
In enacting the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”), Congress sought to facilitate the raising of capital and ordered the SEC to adopt rules permitting the offering of up to $50 million of securities within a 12-month period. In December 2013, the SEC proposed changes to its Regulation A, a little-used exemption that permits offering up to $5 million in securities during any 12-month period.
The SEC has proposed amending Regulation A to divide it into two tiers – Tier 1, permitting the current $5 million of securities, and Tier 2 permitting up to $50 million. As proposed, the use of Regulation A to offer securities would constitute something of a middle ground between raising capital via an exempt private placement and undertaking a full-blown registered offering, having some of the pros and cons of each.
Unlike a private placement under the SEC’s Regulation D, an offer at either the Tier 1 or Tier 2 level would require the company to file an offering statement with the SEC for qualification. However, the disclosure requirements would be less than those in a registration statement. A Tier 1 offering would not require audited financial statements, but a Tier 2 offering would require audited financial statements meeting the standards applicable to a smaller SEC-reporting company.
Following a Regulation A offering, a Tier 1 issuer would file a report with the SEC on the completion or termination of the offering. A Tier 2 issuer would have ongoing reporting obligations for at least the fiscal year in which the offering statement was qualified, although the reporting requirements would be less onerous than following a registered offering and the reporting requirements would be suspended upon the issuer’s meeting certain criteria.
Although the filing and reporting requirements would make a Regulation A offering more expensive and time-consuming than a private placement, it does offer some benefits.
Regulation A permits issuers to “test the waters” by providing soliciting materials to potential investors prior to filing the offering statement to assist smaller issuers in evaluating potential interest in an offering before incurring the costs associated with preparing the offering documents. Although Rule 506 of Regulation D was recently amended to lift the prohibition on general solicitations and advertising, sales can then only be made to “accredited investors,” in contrast to sales to any type of investor under Regulation A.
Unlike securities offered in a private placement, securities offered under Regulation A are not restricted and can be freely transferred, thus making them more attractive to prospective purchasers. Additionally, a Tier 2 offering may include up to $15 million of securities that existing shareholders wish to sell.
Finally, the SEC has proposed that offers under both Tiers 1 and 2 and sales under Tier 2 would be exempt from state securities regulation. Not all private placements offer this benefit. An issuer wishing to take advantage of this, but offering less than $5 million in securities could voluntarily comply with the requirements of Tier 2.
The SEC has requested comments on its proposed rules and it may be some time before the final rules are issued, but for companies hoping to raise capital in the future, Regulation A should be considered and contrasted against the other methods then available.
* Originally printed in Pennsylvania Association of Community Banker’s “Transactions Magazine”