Capital Access: SEC Regulation A+ (“Mini-IPO”)

Capital Access: SEC Regulation A+ (“Mini-IPO”)

March 15, 2018
Capital Access: SEC Regulation A+ (“Mini-IPO”)
Companies turn to a variety of sources to access the funding
Regulation A+). The program’s annual offering upper limit
they need to grow and make new investments. Among them
was increased from $5 million set in 1992 to $50 million
are capital markets, segments of the financial system in
through the JOBS Act. Regulation A+ became effective on
which capital is raised through equity (representing
June 19, 2015. It provides two tiers of offerings.
ownership of a firm) or debt (representing creditorship of a
firm) securities. As the principal regulator of U.S. capital
 Tier 1. Under the Tier 1 regime, an issuer can conduct
markets, the Securities and Exchange Commission (SEC)
securities offerings of up to $20 million in a 12-month
requires that offers and sales of securities either be
period. Tier 1 offerings are subject to both state and
registered with the SEC (referred to as public offerings), or
federal registration, but have fewer federal-level
be undertaken with an exemption from registration (referred
requirements relative to Tier 2.
to as private offerings). Regulation A+ (15 U.S.C. §77a et
seq.), or “Mini-IPO,” is a regime to facilitate private
 Tier 2. Under the Tier 2 regime, an issuer can conduct
offerings for small- to medium-sized companies. A mini-
securities offerings of up to $50 million in a 12-month
IPO is like a regular initial public offering (IPO) in the
period. Unlike Tier 1 offerings, Tier 2 offerings are
sense that the securities for the most part can be sold to all
generally not subject to state registration requirements.
investors and not just sophisticated investors, and could
potentially be listed on public stock exchanges. But unlike
As Figure 1 illustrates, to raise capital through Regulation
an IPO, it is subject to reduced disclosure requirements and
A+, an issuer first files an offering statement with the SEC.
certain offering size and investor limits, among other
During the filing period, the issuer has the option to file a
differences.
draft offering statement (DOS), a draft disclosure document
that receives confidential review from SEC staff before
Congress has a long-standing concern about helping smaller
being formally publicly released. Issuers also have a
companies access capital. Despite Regulation A+’s
“testing-the-waters” option that allows for communication
perceived potential as a means of aiding smaller companies,
with potential investors to gauge their buying interests. The
the total offering volume and breadth of participation at the
actual sale of Regulation A+ securities takes place after the
early stage were considered relatively low. In an effort to
SEC declares through a “notice of qualification” that the
spur greater use, there are legislative proposals in the 115th
securities are ready for sale. No Regulation A+ securities
Congress to further expand Regulation A+’s upper limit,
transactions, payments, or even commitment of future
broaden its eligible issuer base, and to create new venues
payments are allowed prior to the notice of qualification.
for its use in resale and trading.
As discussed earlier, Tier 2 offerings are subject only to
Background
federal regulation, while Tier 1 offerings are subject to both
Regulation A was initially adopted under Section 3(b) of
SEC and state regulation. Each state has its own securities
the Securities Act in 1936 as a private securities offering
regulators who enforce state laws. These laws cover many
that exempts small issuers from certain registration
of the same areas the SEC regulates, such as the sale of
requirements. It was a seldom-used program prior to the
securities and those who sell them, but are confined to
Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-
securities offerings and sales within each state. Registration
106), which was signed into law in 2012. Title IV of the
requirements can vary from state to state.
JOBS Act revamped Regulation A (thus the name
Figure 1. Regulation A+ Offering Timeline

Source: Anzhela Knyazeva, Regulation A+: What Do We Know So Far?, November 2016.
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Capital Access: SEC Regulation A+ (“Mini-IPO”)
regulatory relief is warranted to further expand Regulation
Market Trends
A+. There are legislative proposals in the 115th Congress to
Private offerings have outpaced public offerings in recent
expand the amount that can be raised under Regulation A+
years to become the preferred option for raising capital
(§498 of H.R. 10, which has passed the House, and H.R.
(much of the growth was driven by other private offering
4263, which has been marked up by the Financial Services
types, instead of Regulation A+), as measured by aggregate
Committee) and to broaden the eligible issuers for
capital raised. According to an SEC staff white paper,
participation (H.R. 2864, which has passed the House, and
private debt and equity offerings for 2012 through 2016
§508 of S. 2155, which has passed the Senate).
combined exceeded public offerings by about 26%. Going
Proponents argue that in its current form, Regulation A+
public is arguably no longer a necessity for certain private
still faces hurdles in gaining market acceptance because
companies to raise capital, at least up to a certain size.
such offerings are said to cost more than traditional private
However, concerns persist that smaller companies face
offerings, but tend not to attract major underwriters, broker-
difficulties accessing capital. Private offerings are
dealers, and research coverage, because the deal sizes are
especially important for smaller companies, since they are
small relative to traditional IPOs. By further lifting the
traditionally viewed as the funding tool for smaller, pre-IPO
upper limit, proponents believe it would potentially
firms. Though one of the goals of the JOBS Act was to
alleviate the size-related concerns for market
facilitate public offerings for smaller companies, some
intermediaries. Proponents of a proposal to broaden the
argue that the JOBS Act has not revived public capital
eligible issuer base also argue that thousands of SEC
access for smaller companies with market capitalization of
reporting companies, which include public companies and
less than $75 million. The SEC’s Advisory Committee on
voluntary disclosure companies, are not currently able to
Small and Emerging Companies stated in May 2017 that
access Regulation A+. By allowing more companies to
“identifying potential investors is one of the most difficult
participate, the regime would enhance capital formation.
challenges for small businesses trying to raise capital.”
Smaller companies’ relative difficulty accessing capital
Others consider the expansion of Regulation A+ to
through public offerings has encouraged the use of private
potentially reduce incentives for companies to go public,
offerings as an alternative funding source. If funding needs
thus undermining public securities markets. This may be
remain constant, the increased use of private offerings
considered “harmful” to both investors and markets because
would reduce the need to go public. It is within this context
public offerings provide greater investor protections and
that Congress has initiated a number of policy changes and
liquidity for trading. Some argue against an immediate
legislative proposals focusing on a scaled regulatory
expansion, raising concerns that the program is still in its
approach that would ease smaller firms’ access to private
early stage. After all, the upper limit was increased by 10
offerings, including Regulation A+.
times to $50 million from $5 million in 2015. The regime’s
long-term effects have not been observed in full, leading
Regulation A experienced a ramp up starting June 19, 2015,
some to question whether now is the optimal time to extend
when Regulation A+ went into effect. It had 97 qualified
the program, especially given that the SEC already has the
offerings seeking $1.8 billion over the initial 18 months
discretion to change the size limit.
after going into effect, a significant increase over the pre-
JOBS Act long-term average. Though it increased
As mentioned earlier, Regulation A+ securities have no
significantly, its annual volume is relatively low compared
resale restrictions and could potentially trade on public
to the total private offering issuance of $1.68 trillion in
exchanges, but the incidences of exchange-listed trading
2016. In addition, instead of being broadly adopted across
have been rare. One policy proposal would be to permit the
various sectors, the program so far has mainly been utilized
private sector’s establishment of a “venture exchange”
by the financial services industry, with around 37% of the
(§456 of H.R. 10) that would serve as a new market
Regulation A+ filings and half of the proceeds going to that
specifically for Regulation A+ and other eligible securities.
sector, according to an SEC staff report.
This new trading platform is believed to be of value to
smaller companies seeking capital and liquidity because it
Furthermore, although securities issued under Regulation
creates more exit opportunities for investors by exchanging
A+ have the option to trade on public exchanges, the listing
securities ownership for cash, among other benefits.
of Regulation A+ securities on public trading platforms is
Opponents of the proposal raise concerns over the viability
still uncommon. There were reportedly a total of eight listed
of a new venture exchange. They cite the failed attempts in
Regulation A+ offerings in 2017. Seven of the eight listed
the past and the availability of existing infrastructure that
offerings were trading at an average of 42% below their
could be altered to serve the same needs, which are
offer prices (relative to an average price rise of 22% for a
believed by some to be less opaque and more efficient than
traditional IPO in 2017), meaning the listing is rare and
establishing a whole new platform. Experts generally
they generally underperform traditional IPOs.
believe that, among other things, appropriate regulatory
Policy Issues
oversight and securities disclosure are the necessary
prerequisites for a proposed venture exchange to succeed,
The JOBS Act initiated a number of policy changes to
which would depend on SEC rulemaking.
facilitate both public and private offerings for smaller
companies. The act has helped focus attention on a scaled
Eva Su, Analyst in Financial Economics
regulatory approach that would ease access to private
offerings for smaller firms, including through its
IF10848
establishment of Regulation A+. But some argue that
because of the relatively low adoption of the regime, more
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Capital Access: SEC Regulation A+ (“Mini-IPO”)

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