Regulation A will soon be available for publicly reporting companies. On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law. Although the Act largely focuses on the banking industry and is being called the Dodd-Frank Rollback Act by many, it also contained much-needed provisions amending Regulation A+ and Rule 701 of the Securities Act.
The Act also amends Section 3(c)(1) of the Investment Company Act of 1940 to create a new category of pooled fund called a “qualifying venture capital fund,” which is a fund with less than $10,000,000 in aggregate capital contributions. A qualifying venture capital fund is exempt from the registration requirements under the 1940 Act as long as it has fewer than 250 investors. Section 3(c)(1) previously only exempted funds with fewer than 100 investors. The amendment is effective immediately and does not require rulemaking by the SEC, although I’m sure it will be followed by conforming amendments.
Giving strength to the annual Government-Business Forum on Small Business Capital Formation (the “Forum”), the Act amends Section 503 of the Small Business Investment Incentive Act of 1980 to require the SEC to review the findings and recommendations of the Forum and to promptly issue a public statement assessing the finding or recommendation and disclosing the action, if any, the SEC intends to take with respect to the finding or recommendation. This provision is effective immediately without the requirement of further action.
Section 508 of the Act directs the SEC to amend Regulation A+ to remove the provision making companies subject to the SEC Securities Exchange Act reporting requirements ineligible to use Regulation A/A+ and to add a provision such that a company’s Exchange Act reporting obligations will satisfy Regulation A+ reporting requirements.
I have often blogged about this peculiar eligibility standard. Although Regulation A is unavailable to Exchange Act reporting companies, a company that voluntarily files reports under the Exchange Act is not “subject to the Exchange Act reporting requirements” and therefore is eligible to use Regulation A. Moreover, a company that was once subject to the Exchange Act reporting obligations but suspended such reporting obligations by filing a Form 15 is eligible to utilize Regulation A. A wholly owned subsidiary of an Exchange Act reporting company parent is eligible to complete a Regulation A offering as long as the parent reporting company is not a guarantor or co-issuer of the securities being issued. It just didn’t make sense to preclude Exchange Act reporting issuers, and the marketplace has been vocal on this.
In September 2017 the House passed the Improving Access to Capital Act, which would allow companies subject to the reporting requirements under the Exchange Act to use Regulation A/A+. OTC Markets also petitioned the SEC to eliminate this eligibility criterion, and pretty well everyone in the industry supports the change.
As noted, the Act directs the SEC to amend Regulation A to enact the changes; however, the timing remains unclear. Whereas many provisions in the Act have specific timing requirements, including a requirement that the changes to Rule 701 be completed within 60 days, Section 508 has no timing provisions at all.
Rule 701 of the Securities Act provides an exemption from the registration requirements for the issuance of securities under written compensatory benefit plans. Rule 701 is a specialized exemption for private or non-reporting entities and may not be relied upon by companies that are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Rule 701 exemption is only available to the issuing company and may not be relied upon for the resale of securities, whether by an affiliate or non-affiliate.
Section 507 of the Act directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation-adjusted every five years. The amendment must be completed within 60 days.