Last month, the U.S. Securities and Exchange Commission (“SEC”) announced it had adopted final rules to amend certain parts of Regulation A[1] promulgated under the Securities Act of 1933 (“Securities Act”).
These new rules implement changes as directed by the Economic Growth, Regulatory Relief, and Consumer Protection Act[2] signed into law on May 24, 2018 by President Donald J. Trump. There are two conceptual changes, both affecting Regulation A as it applies to reporting companies.
The first change is to remove the existing requirement that an issuer not be subject to the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”) immediately prior to the offering.
The second change is to eliminate the periodic and current reporting requirements of Rule 257, otherwise required for an issuer completing a Tier 2 offering under Regulation A, for any issuer that is subject to the reporting requirements of the Exchange Act, if the issuer is in compliance with its obligations thereunder.
As so amended, Regulation A could prove particularly useful to reporting companies that seek to use stock consideration ($50 million or less in a Tier 2 offering) to acquire a target company with many equity holders in a transaction that would otherwise require registration on Form S-4 due to the unavailability of Rule 506 of Regulation D or another exemption from registration under the Securities Act.
The SEC Staff has confirmed in published guidance (Compliance & Disclosure Interpretation, Question 182.07) that Regulation A may be relied upon by an issuer for business combination transactions, such as a merger or acquisition.
Advantages of Regulation A over Form S-4 Registration
As with a registered offering on Form S-4, the securities to be issued in a Regulation A offering will be unrestricted and freely tradeable under the Securities Act, though issuers and recipients of the securities will need to be mindful of transfer restrictions under Rule 144 in respect of any “control securities.”
In addition, there are several advantages to relying on Regulation A for an offering of securities related to a business combination instead of registering the offering on Form S-4:
- Incorporation by reference of information with respect to the issuer.
- Timing and SEC Staff comments.
- Relaxed exhibit requirements.
- Federal preemption of state blue sky laws.
- No strict liability under Section 11 of the Securities Act.
- Greater flexibility to communicate with target company shareholders.
- Integration safe harbor.
- Potential greater flexibility with lock-up agreements.
- No filing fee.
Disadvantages of Regulation A over Form S-4 Registration
Although there are a number of advantages to using Regulation A over Form S-4, there are a few disadvantages as well as some other issues to consider:
- Regulation A eligibility restrictions.
- $50 million limit.
- Limitation on sales of securities not listed on a national securities exchange.
- No relief from antifraud rules or fiduciary duty of disclosure.
- No forward incorporation by reference under Form 1-A.
For a more detailed explanation of these advantages and disadvantages, see the article “INSIGHT: Regulation A Could Become Useful Alternative to Form S-4 Registration for Reporting Companies”, which we published last summer on Bloomberg Law.
Conclusion
The expansion of Regulation A to reporting companies may significantly reduce the compliance obligations under the Securities Act in respect of securities offerings made in connection with business combination transactions, particularly for small cap companies acquiring smaller companies with diverse shareholder bases that previously would have otherwise required an expensive and time-consuming registration on Form S-4. It will be interesting to see how practice develops in this area.
[Please note: these final rules will become effective upon publication in the Federal Register, which has not occurred as of the date this article was posted.]
[1] 17 CFR 230.251 through 230.263.
[2] Pub. L.115-174, 132 Stat. 1296 (2018).