March 14, 2018
by Larry E. Bergmann

 

Regulation A under the Securities Act of 1933 provides an exemption from the full registration requirements otherwise applicable to public offerings of securities.[1]  The offering limits in Regulation A were increased in 2015 to $50 million per 12-month period (so-called Regulation A+ offerings), and there has been an uptick in the use of the exemption.[2] 

The Regulation A exemption contains a number of conditions on its availability.  In particular, the exemption currently is not available to an issuer that is subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934.  That means that, after an issuer offered securities to the public and became subject to those reporting requirements, it could not avail itself of Regulation A to make a subsequent offering.  That may change: proposed legislation to amend the Dodd-Frank Act would remove that restriction.[3]  That has the potential to significantly broaden the use of the exemption, especially by smaller reporting companies.

Companies seeking to raise money by selling securities “tokens,” such as in so-called “initial coin offerings” (ICOs), may consider Regulation A to be an attractive financing vehicle.  While the SEC has been quite accommodating in providing guidance on the use of Regulation A,[4] its recent expressions of concern about initial coin offerings suggests that Regulation A offerings in this space may draw heightened scrutiny.[5]

The SEC has a number of tools at its disposal to address perceived concerns about offerings of securities to the public.  In addition to seeking injunctions and other relief based on allegations of securities law infractions in connection with securities offerings, which can take time to bring to resolution,[6] the Commission also can take administrative actions that can have immediate effect.[7]  For example, the SEC can issue a “stop order” suspending the effectiveness of a registration statement if it appears to the SEC that the registration statement includes untrue or misleading statements.[8]  Similarly, the SEC can temporarily suspend an offering being made pursuant to a Regulation A exemption.[9]  The bases for suspending the exemption are very broad:

"The Commission may at any time enter an order temporarily suspending a Regulation A exemption if it has reason to believe that:

(1) No exemption is available or any of the terms, conditions or requirements of Regulation A have not been complied with;

(2) The offering statement, any sales or solicitation of interest material, or any report filed pursuant to Rule 257 (§230.257) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;

(3) The offering is being made or would be made in violation of section 17 of the Securities Act;[10]

(4) An event has occurred after the filing of the offering statement that would have rendered the exemption hereunder unavailable if it had occurred before such filing;

(5) Any person specified in Rule 262(a) (§230.262(a)) has been indicted for any crime or offense of the character specified in Rule 262(a)(1) (§230.262(a)(1)), or any proceeding has been initiated for the purpose of enjoining any such person from engaging in or continuing any conduct or practice of the character specified in Rule 262(a)(2) (§230.262(a)(2)), or any proceeding has been initiated for the purposes of Rule 262(a)(3)-(8) (§230.262(a)(3) through (8)); or

(6) The issuer or any promoter, officer, director, or underwriter has failed to cooperate, or has obstructed or refused to permit the making of an investigation by the Commission in connection with any offering made or proposed to be made in reliance on Regulation A."[11]

Regulation A can be an attractive vehicle for issuers in the evolving blockchain technology space to offer securities to the public.  However, issuers must proceed with the expectation that the SEC will be watching with considerable interest and will take action if it perceives potential investor harm.

 

[1] Securities Act Rules 251-263, 17 CFR 230.251-263.  See generally, “Investor Bulletin: Regulation A,” SEC, Office of Investor Education and Advocacy (July 8, 2015), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_regulationa.html.  Persons contemplating Regulation offerings also must consider the requirements of State regulations.  See, e.g., http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/.

[2] See, e.g., Knyazeva, A., “Regulation A+: what do we know so far?,” SEC, Division of Economic and Risk Analysis (November 2016), https://www.sec.gov/files/Knyazeva_RegulationA%20.pdf.

[4] See, e.g., “Compliance and Disclosure Interpretations,” Section 182, SEC, Division of Corporation Finance (Updated November 6, 2017), https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.

[5] See, e.g., “Company halts ICO after SEC raises registration concerns,” SEC Press Rel. 2017-227 (December 11, 2017), https://www.sec.gov/news/press-release/2017-227.

[6] However, the SEC can obtain emergency relief in Federal court actions.  See, e.g., “SEC halts alleged initial coin offering scam,” SEC Press Rel. 2018-8 (January 30, 2018), https://www.sec.gov/news/press-release/2018-8.

[7] The Commission has exercised other summary administrative powers to address perceived deficiencies in the blockchain technology space.  See Bergmann, L., “Another arrow in the SEC’s quiver: trading suspensions” (February 21, 2018), https://www.blockchainlawcenter.com/blog/blockchain-law-center/another-arrow-in-the-sec-s-quiver/.

[8] Securities Act Section 8(d), 15 USC 77h(d).

[9] Securities Act Rule 258.

[10] In this connection, the “anti-touting” provision of Securities Act Section 17(b) is noteworthy.  See “SEC statement urging caution around celebrity backed ICOs,” SEC, Division of Enforcement and SEC Office of Compliance Inspections and Examinations (November 1, 2017), https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos.

[11] Securities Act Rule 258(a).