By John Lowy
So-called Regulation A+ has generated a lot of interest, and well over 100 companies have filed with the SEC to raise capital via Reg A+. In my previous article in MicroCap Review, I stated that Reg A+ is an excellent way for a company to raise up to $50,000,000, especially if it sells its products to individual consumers.
The SEC’s commentary to the Regulation A amendments states that their mandate is to review these amendments after two years. The rule changes were promulgated on March 25, 2015—the two year period is approaching an end, so it’s a good time to review and reflect on certain of the Regulation A amendments that were made, and some that I believe should have been made.
A question often asked about Reg A+ eligibility is, “Is a company that is already public eligible to raise capital through a Regulation A+ offering?” And the answer, which is a common reply to many questions about SEC laws and regulations, is “Yes, and no.”
Yes, privately-owned companies and non-reporting public companies (which usually trade on OTC Markets’ “Pink Sheets” as non-reporting issuers), are eligible to raise up to $50,000,000 in a Tier 2 Regulation A+ offering, if they have audited financial statements). Or, these non-reporting but publicly traded companies can raise up to $20,000,000 in a tier 1 Reg A+ offering, without having audited financials.
However, although US and Canadian companies have always been eligible to use Regulation A+, since the inception of Reg A, most SEC-reporting issuers, explained below, have been ineligible to use Regulation A. Why? Probably because when the Regulation was announced, it was thought that a $300,000 maximum would differentiate it from registered public offerings using Form S-1, which had—and still has—no ceiling.
Probably the most artificial eligibility distinction—which has survived since Regulation A was first promulgated, is that 1934 Act Section 12g reporting issuers are ineligible, but companies which become voluntary SEC filers one year after their 1933 Act S-1 registration statement becomes effective are eligible.
Section 15d of the 1934 Act states that an issuer’s duty to file reports under Section 13 of that Act (Forms 10-K and 10-Q, etc.) is automatically suspended one year after its S-1 registration statement is declared effective, if the issuer has less than 400 shareholders. Many, if not most, such issuers have less than 400 shareholders after one year; thus, they are no longer “subject to” the reporting requirements of Section 13 or 15d; therefore, if this voluntary filer continues to file their 10-K and 10-Qs each year (and 8-Ks when appropriate), it is eligible to raise up to $50,000,000 in a Reg A+ offering.
However, an issuer which either has more than 400 shareholders one year after its S-1 offering, or which files a Form 8-A and becomes a Section 12g reporting issuer, i.e., no longer a voluntary filer, is no longer eligible to use Regulation A+. Or, if a 12g issuer transfers its assets and business to a newly-formed subsidiary, making the 12g parent a holding company, the subsidiary would be eligible for Reg A+ but not the parent.
The similarities between 12g and 15d reporting issuers are, in my opinion, the most important for investors: the requirement to file an Annual Report on Form 10-K with audited financials, quarterly reports on Form 10-Q (which are reviewed by the auditor), and Reports on Form 8-K when either required by that Form or appropriate in the issuer’s discretion.
The additional disclosures required by 12g reporting issuers--such as 5% holders vs. 10% holders, short-swing profits rules, proxy filings, Williams Act Schedule 13D rules—are also important for investors, but in my opinion are not as significant as the basic reporting requirements for both 12g and 15d issuers.
Another anomaly is that subsidiaries of SEC-reporting issuers are eligible to use Reg A+ (although the subsidiary cannot consolidate the parent’s assets or business), while the parent remains ineligible.
So, given that the hallmark of all SEC laws and regulations has always been DISCLOSURE, I believe that Regulation A+ should be amended as soon as possible to permit all reporting issuers to use this Regulation--whether section 12g or 15d issuers, whether voluntary or required to report.
Indeed, OTC Markets filed a petition with the SEC on June 6, 2016 (Petition no. 4-699), to amend Regulation A to allow all reporting issuers to use Reg A+, and I submitted a letter in support of that petition.
So, my recommendation is that the SEC add all US and Canadian reporting issuers--15d and 12g--to the list of companies which are eligible to use Regulation A+ (provided that they are current in their filings and in compliance with the other requirements).
John Lowy is the founder (in 1993) and CEO of Olympic Capital Group, Inc. (www.ocgfinance.com), and is the principal of his law firm John B. Lowy PC, both based in New York City. John is a highly-respected and acknowledged expert in reverse mergers, capital formation, financial consulting and initial public listings. He is also a licensed FINRA-registered representative with Transnational Capital Corporation, a New York-based broker-dealer.
As an attorney, an advisor or as a principal, John has led or participated in more than 200 such transactions, creating market value in excess of $5 billion. He has been instrumental in leading the process by which many companies have reverse merged and achieved listings on the NASDAQ or the AMEX.
In addition to the U.S., John has completed transactions for clients based in Australia, Brazil, Canada, the Caribbean, China, Hong Kong, India, Korea, Philippines, Singapore, South Africa, Turkey, UK, Vietnam and other nations. The sectors in which these clients are engaged range from high tech to low tech, real estate, pharmaceuticals, medical devices, oil and gas, mining, solar power and other renewable energy, entertainment, food, forestry, agriculture, education and retail, among others.
John received his B.A. from Tufts University and began practicing law after graduating from the University of Pennsylvania Law School.
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