The Securities and Exchange Commission announced on December 19, 2018 that it has adopted final rules that will permit full SEC reporting companies to conduct public offerings utilizing the modern crowdfunding capabilities with Regulation A+. We are still awaiting the details of the new rules, but they will become effective immediately upon publication in the Federal Register, which typically happens within a few weeks of the announcement. The SEC was required to adopt these rules by the Economic Growth, Regulatory Relief and Consumer Protection Act, passed back in May.
Previously, the Reg A+ rules required that a company cannot use Reg A+ if it is subject to the SEC reporting requirements immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reversed that and now the SEC has changed the rules to permit reporting companies to utilize Reg A+.
While we await the details of the new rules, it is clear that this will benefit full reporting companies that trade over-the-counter, since they can now conduct a public offering preempted by state “blue sky” merit review of their offering. In addition, even listed companies may decide that accessing the ability to “test the waters” with any investor, not permitted with a traditional public offering, is attractive as they market a new public offering. This may also assist companies that are for some reason not eligible for short form registration of public offerings on Form S-3, such as those who went public within the last year or those who had a late SEC filing in the last year. Check this one off the list of desired changes to the already well-designed rules under Regulation A+.
On December 18, 2018, the SEC approved final rules requiring companies to disclose their practices or policies with respect to hedging transactions by officers and other employees as well as directors. The final rules have not yet been published, but the SEC issued a press release (https://www.sec.gov/news/press-release/2018-291) describing the rule it adopted. The new rule implements Section 955 of the Dodd-Frank Act.
New Item 407(i) of Regulation S-K will require a company to disclose in proxy or information statements for the election of directors its practices or policies for officers and other employees, as well as directors, relating to:
- purchasing securities or other financial instruments, or otherwise engaging in transactions,
- that hedge or offset, or are designed to hedge or offset,
- any decrease in the market value of equity securities granted as compensation or held, directly or indirectly, by the officer, other employee or director.
The new item has broad application for affiliated entities and will require disclosure of practices or policies on hedging activities with respect to equity securities of the company, any parent or subsidiary of the company or any subsidiary of any parent of the company.
Companies may either summarize their practices or policies for these types of hedging activities or, alternatively, disclose their practices or policies in full. If a company does not have a practice or policy with respect to hedging activities, it must disclose that fact or state that it permits hedging transactions generally.
Companies will be required to comply with the new disclosure requirements in proxy and information statements for the election of directors during fiscal years beginning on or after July 1, 2019. “Smaller reporting companies” and “emerging growth companies” will have an additional year to comply with the new disclosure requirements. Companies that have adopted policies on hedging may opt to provide the additional disclosure during the 2019 proxy season.
Reporting from the Practising Law Institute’s Annual Institute on Securities Regulation here in New York City. I was honored to serve on a panel next to Jennifer Zepralka, head of the SEC’s Office of Small Business Policy. Jennifer provided a very positive report on Regulation A+. Here are the highlights:
- Since the new Reg A+ rules went effective in June 2015 and through September 2018, 123 public offerings were completed raising a total of $1.3 billion. That’s an average of about $10 million raised per deal since 2015.
- These numbers compare to the report from a year ago that 69 deals had been completed by September 2017 raising an aggregate of $612 million or $8.8 million per deal. Doing the simple math, this means there were 54 new deals in the last year – close to double the number of deals compared to the two plus years before.
- Doing more math: total funding in the last year more than doubled the total amount raised though Reg A+ offerings from the two years before. In other words, $612 million raised between June 2015 and September 2017 and another $688 million raised just in the one year ended September 2018.
- Doing more more math: the average deal size increased notably to $12.7 million in the year ended September 2018 vs. $8.8 million in the two years ended September 2017. That’s a 44% increase in the average deal size.
Jennifer also reported on the SEC’s Congressional mandate, under the Improving Access to Capital Act, to adopt rules to allow full SEC reporting companies to utilize Reg A+. She said the SEC is “taking steps” toward that regulatory initiative but offered no timeline on when it would be completed. She also made clear that current SEC reporting companies cannot go ahead and use Reg A+ until those rules are fully adopted.
Despite some of the reports (and my own commentary at times), Reg A+ is achieving its purpose – to help smaller companies raise capital and create jobs. And the fact that the number of deals, total funding and average deal size are all strongly increasing also is very encouraging. The “shakedown cruise” continues for exchange-listed Reg A+ issuers, but many believe this ship has many more years of successful dealmaking ahead.