Appeared in Law360 on August 24, 2015. Originally appeared in the Kaye Scholer M&A and Corporate Governance Newsletter.
—by Chris Peterson
» Click here to read more articles from our latest M&A and Corporate Governance Newsletter. On June 19, 2015, the final rules to amend Regulation A under the Securities Act of 1933 became effective. Of particular interest to mergers and acquisitions practitioners, on Aug. 6, 2015, the SEC issued its most recently updated compilation of compliance and disclosure interpretations. The C&DI make clear that Regulation A can be used in merger or acquisition transactions that otherwise meet the requirements of Regulation A. Regulation A may be particularly useful in circumstances where a potential acquirer wants to issue equity securities as acquisition consideration without registration under the Securities Act but the facts of the proposed acquisition limit the availability of the Regulation D exemption.
Overview of Regulation A
As amended, Regulation A provides an exemption for certain U.S. and Canadian companies that are not otherwise required to file reports under the Securities Exchange Act of 1934 to raise up to $50 million in a 12-month period. Regulation A offerings have been historically rare, particularly when compared to the frequency of Regulation D offerings, and the new Regulation A is intended to increase the utility of the exemption.
Regulation A now includes two tiers: tier 1 for smaller offerings raising up to $20 million in any 12-month period and tier 2 for offerings raising up to $50 million in any 12-month period. The primary advantage of a tier 2 offering compared to a tier 1 offering (other than the higher maximum offering amount of $50 million) is that the registration and qualification requirements under state blue sky securities laws are preempted by Regulation A for tier 2 offerings.
The general eligibility, filing and ongoing reporting requirements of Regulation A are summarized below.
Eligible Issuers and Securities
The Regulation A exemption is generally available to issuers organized and having their principal place of business in the United States or Canada that are not otherwise required to file reports under the Exchange Act. Certain types of issuers are ineligible to offer or sell securities under Regulation A, including (1) SEC reporting companies, (2) blank check companies, (3) investment companies and (4) entities issuing fractional interests in oil, gas or mineral rights. Regulation A now also includes bad-actor disqualification provisions that are largely consistent with those included in Rule 506(d) under the Securities Act.
The securities that may be offered under Regulation A are limited to equity securities (including warrants), debt securities and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities.
Initial Filing and Delivery Requirements
An issuer that seeks to rely on Regulation A must file and qualify an offering statement on Form 1-A. The offering statement may be submitted for nonpublic review by the SEC. As with emerging growth companies under Section 102(b)(1) of the Jobs Act (EGCs), if an issuer opts for confidential review, the offering statement must be filed publicly not less than 21 calendar days before qualification of the offering statement. Form 1-A requires relatively streamlined disclosure compared to a Form S-1 or Form S-4 and the general requirements of Form 1-A may be summarized briefly as follows:
- Part I. Requires certain basic information regarding the issuer and its eligibility; the offering details; the jurisdictions where the securities will be offered; and sales of unregistered securities.
- Part II. Contains the narrative portion of the offering statement, including basic information about the issuer; material risks; use of proceeds; a business overview; a management discussion and analysis (MD&A)-type discussion; executive officers’ and directors’ compensation; beneficial ownership information; related-party transactions; and a description of the offered securities. While similar to Part I of Form S-1, the disclosure requirements are less extensive.
- Financial Statements. Both tier 1 and tier 2 issuers are required to file balance sheets and other required financial statements as of the two most recently completed fiscal year-end dates. Tier 1 issuers may file unaudited financial statements (provided that they have not already obtained audited financial statements for other purposes), but tier 2 issuers are required to file audited financial statements.
Issuers domiciled in the United States must prepare their financial statements in accordance with U.S. generally accepted accounting principles while Canadian issuers may prepare their financial statements in accordance with either U.S. GAAP or international financial reporting standards as issued by the International Accounting Standards Board.
Ongoing Reporting Requirements
Tier 1 Issuers. Tier 1 issuers are not subject to any ongoing reporting obligations other than the obligation to provide certain information (such as the date the offering commenced, the price and total amount of securities sold and net proceeds to the issuer) on Form 1-Z within 30 days after the completion or termination of the offering.
Tier 2 Issuers. Tier 2 issuers must provide the same information as tier 1 issuers. In addition, tier 2 issuers are required to file ongoing statements with the SEC via Edgar, specifically annual reports on Form 1-K, semi-annual reports on Form 1-SA and current event reports on Form 1-U.
Form 1-K is similar in scope to the Form 1-A filed in connection with the Regulation A offering. Form 1-K contains information regarding business operations for the prior three fiscal years (or since inception); related-person transactions; beneficial ownership of voting securities by directors, executive officers and 10 percent owners; the biographies of directors, officers and significant employees; compensation of the three highest-paid executive officers or directors for the last three fiscal years; a scaled MD&A for the last two fiscal years and audited financial statements. The financial statements included in the Form 1-K must be prepared on the same basis and are subject to the same audit requirements as the financial statements included in the Form 1-A offering statement for tier 2 offerings. Form 1-K must be filed within 120 calendar days after the issuer’s fiscal year end.
The semi-annual report on Form 1-SA is similar to a Form 10-Q, subject to scaled disclosure requirements. The report is generally required to be filed within 90 days after the end of the first six months of the issuer’s fiscal year end.
Form 1-U is analogous to Form 8-K and is required to be filed by tier 2 issuers upon the occurrence of certain significant events, such as fundamental changes in the business; bankruptcy or receivership; a material modification to the rights of security holders; changes in control; principal executive officer, financial officer or accounting officer departures; or unregistered sales of 10 percent or more of outstanding equity securities.
Regulation A in M&A Transaction
Despite some uncertainty resulting from the Regulation A adopting release, the C&DI makes clear that Regulation A can be used in merger and acquisition transactions.
Acquirers regularly use Regulation D to issue merger consideration in the form of securities, and this practice will undoubtedly continue. However, the use of Regulation D can prove difficult in certain circumstances, such as an acquisition of a target company with a significant number of stockholders who are not accredited investors. In such circumstances, many potential acquirers may be reluctant to issue securities as consideration since it would likely require the issuer to file a registration statement on Form S-4 and thereafter become subject to the ongoing reporting requirements of the Exchange Act.
Potential acquirers in these circumstances may now consider using Regulation A. While these issuances will be subject to the limits and requirements outlined above, the relatively streamlined requirements of Regulation A could make it a useful tool for M&A practitioners.
 Question: Can Regulation A be relied upon by an issuer for business combination transactions, such as a merger or acquisition? Answer: Yes. The final rules do not limit the availability of Regulation A for business combination transactions, but, as the Commission (SEC Rel No. 33-9497) indicated, Regulation A would not be available for business acquisition shelf transactions, which are typically conducted on a delayed basis. [June 23, 2015]
 Under Tier 2, up to $15 million of the $50 million aggregate offering may consist of secondary sales, provided that the selling security holder component cannot exceed 30 percent of the aggregate of the initial offering and any subsequent Regulation A offering in the 12 months thereafter.
 Tier 1 offerings under Regulation A may be of limited utility for issuers because tier 1 offerings remain subject to state blue sky securities laws, similar to Regulation A offerings before the Jobs Act.
 Consistent with the treatment of EGCs under the Jobs Act, Regulation A permits issuers to delay implementing new accounting standards.
 The requirement to file Form 1-A commences following the most recent fiscal year for which full financial statements were included in the Form 1-A offering statement or, if the Form 1-A offering statement included six-month interim financial statements for the most recent full fiscal year, then for the first six months of the following fiscal year.
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