On May 24, the President signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law. While most of the Act addresses banking regulations enacted by the 2010 Dodd-Frank Act, the Act made some small, yet significant, changes to existing securities regulations.
For public companies that are required to file reports with the Securities and Exchange Commission (the “SEC”) and whose stock is not listed on a national securities exchange, Section 508 of the Act provides a significant change to the exemption for issuances of securities in a public offering under Regulation A+ (“Reg A+”) which provides an exemption from registration under the Securities Act of 1933. Previously, Reg A+ was limited to companies that were not subject to the repotting requirements of the Securities Exchange Act of 1934 (a “Reporting Company” or “Repo11ing Companies”). The Act requires the SEC to implement the enacted changes to Reg A+ via rnlemaking and will become effective once the SEC adopts the Reg A+ changes to Rules 251 and 257 of the Securities Act of 1933. When we contacted the SEC staff, it was unable to provide a timeline for when the changes would become effective. However, the staff member advised one of the undersigned that that they expect the SEC will use a process to implement the new law without resorting to the lengthy notice and comment procedure required by the Administrative Procedure Act.
The Act provides unlisted Reporting Companies with a significant new tool. Previously Reporting Companies wanting to raise money in a public offering to unaccredited (as well as accredited) investors were limited to using a Form S-1 Registration Statement.1 Reg A+ offers a significant advantage over Form S-1 offerings up to $50 million. The Reg A+ offerings are exempt from all state blue sky laws except for the simple requirement to file a basic fotm and pay a fee. In contrast, unlisted Reporting Companies must comply with the rigorous merit review standards in states like California, Texas, Massachusetts, and Pennsylvania, as well as Florida unless priced at least $5.05 per share.2 As a practical matter, unlisted Reporting Companies carmot comply with the merit review standards so they cannot offer their securities to residents of such states.
This change in Reg A+ comes as a breath of fresh air, enabling unlisted Reporting Companies to publicly offer securities to unaccredited investors without burdensome regulatory requirements which often hinder the ability of unlisted Repmting Companies to raise capital. For unlisted Repo1ting companies who require access to capital, this change comes as a much needed opportunity to raise capital without expensive and excessive regulatory review. Further the Act opens up a huge market consisting of investors in many large states.
Additionally, Section 504 of the Act amended the Investment Company Act of 1940 to exempt a venture capital fund with less than $IO million in committed capital and no more than 250 investors from the definition of an “Investment Company.” Previously, only funds with no more than I00 investors were exempted. While the $10 million limit on committed capital remains unchanged, this change facilitates the fonnation of funds with a greater number of investors that can form an investment fund without complying with the onerous requirements of the Investment Company Act.
1 The one exception is if a Reporting Company has a market cap of $75 million as of a specified date it can use Form S-3 which is a short fonn registration statement but the Reporting Company is still subject to state merit review standards in most states.
2 Exchange listed Reporting Companies have been exempt from the rigorous state merit review laws since 1995.