May 10, 2012
Our firm is of the position that the recent statutorily mandated changes to Section 3(b) of the Securities Act of 1933 (the 33 Act), commonly referred to as Reg A reform, presents the best possible balance between the ability to allow small and lower mid-market business to form capital while maintaining a rigorous, but workable regulatory structure at the federal and state levels.
Our office receives calls on a regular basis from issuers wanting to know the status of regulatory changes to accommodate the statute and when some indication of what they will look like will be received. Our strong sense is that, from a hard-dollar perspective, the Reg A market will not in the foreseeable future have the scope of the private market. Nevertheless, we believe that the Reg A changes will have the most meaningful impact to a major portion of the folks the JOBS Act was intended to benefit – specifically, the middle and lower middle market in industries that create jobs. Our clients and prospective clients include developer/operators of Alzheimer facilities, operators of plants that create fuel from alternative sources, medical device companies and developers of commercial centers in rural areas, to name a few.
The fact is there are any number of issuers are happy to submit to the scrutiny of federal and state regulation, as well as the rigorous demands of investment banks and the market, to efficiently raise capital in an environment that does not present expenses or ongoing financial burdens far in excess of the size or their businesses. Rule 506 general solicitation may likely have an impact, but this will likely be the purview of product providers and those seeking institutional investment given the implications of the restricted nature of 506 securities. Improved Reg A provides the liquidity and sophistication, in our view, to attract the investment banks and financial professionals to maintain to the quality and viability of this market.
In addition to the foregoing remarks on the importance of alacrity and restraint on the part of the Commission in developing regulations around the revised Regulation A, we have the following specific comments on various aspects of Reg A reform:
Limited Periodic Reporting. It is our belief that because of the unrestricted nature of Regulation A securities, an active secondary market could develop for them. Such a market would need uniform information on the various securities and issuers in order to function, so we believe that the Commission should require limited periodic reporting for Reg A issuers. We believe simple quarterly reports and requirements to report material events make sense however, burdensome regulations regarding internal controls and auditing, to name a few, would quickly render Reg A reporting standards too expensive for the expected Regulation A issuer.
Reformation of Rule 253(e) Related to Updated Offering Circulars. Because of the $50 million limit on Regulation A, it is our expectation that the vast majority of Regulation A deals will be done of a continuous, best efforts basis. This will result in necessary updates to offering circulars. Currently Rule 253(e) requires any updated or revised Offering Circular to be filed with an amended Offering Statement and requalified with the Commission. This requalification requirement places an unnecessary burden on issuers in continuous Reg A offerings, and one not seen in the context of a public registration where only information tripping the requirements of Item 512 of Reg S-K requires a post-effective registration statement amendment and other updates to the prospectus may be filed under Rule 424. We believe a similar regime would be beneficial to Regulation A.
Separate $5million Exemption. We believe it important that the result of the Commissions rulemaking is a set of 2 related exemptions, a $ 5 million and a $ 50 million Reg A rather than one integrated new Regulation A. The bifurcation of Section 3(b) of the 33 Act by Title IV of the JOBS Act suggests this intent on the part of Congress. While certain adjustments under the JOBS Act could be applied to both potential exemptions, we believe that uniform application of the new requirements must be assessed in light of the relative raise amounts and the on-going financial burden to those issuers.