Presenting a live 90-minute webinar with interactive Q&A Reg A and Reg D: Evolving Securities Exemptions for Private Placement Offerings Navigating Regulation A+, the FAST ACT, Rule 506(c), and Accredited Investors; Recent SEC Guidance and the HALOS Act TUESDAY, MAY 16, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Arthur McMahon, III, Partner, Taft Stettinius & Hollister , Cincinnati Bridget C. Hoffman, Partner, Taft Stettinius & Hollister , Cincinnati Brandi N. Weekley, Attorney, Taft Stettinius & Hollister , Cleveland The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Regulation A and Regulation D: Evolving Securities Exemptions for Private Placement Offerings Bridget C. Hoffman Arthur McMahon, III Brandi N. Weekley May 16, 2017
Roadmap • Introduction: The Securities Act in Brief • Regulation A+ • The FAST Act; Private Resales of Securities • Regulation D: Rules 506(b) and 506(c) • Recent Compliance and Disclosure Interpretations – Regulation A+ – Regulation D • The HALOS Act and Beyond 2
The Securities Act in Brief • You may not sell securities in the United States without Securities Act registration or exemption • Registration is not viable for many companies – Cost ($3.7 million average for 1 st time issuers) – Offering compliance – Ongoing compliance – Liabilities – Market and liquidity issues 3
The Securities Act in Brief • Instead, most companies rely on exemptions from registration: – “Scaled Registration” – Regulation A – Private Placements – § 4(a)(2); Regulation D • Each exemption has unique requirements, restrictions, costs, and benefits 4
The Securities Act in Brief: Key Questions • Who Can You Sell To? – Sophisticated Investors vs. Retail – Accredited Investors – Individual Investors • $1 million net worth or $200,000 annual income ($300,000 for married couples) – Entities • $5 million total assets • Not “formed for the purpose” 5
The Securities Act in Brief: Key Questions • How Can You Sell? – Broadly, to strangers – Narrowly, through pre-existing relationships – General solicitation or advertising • Print media, broadcast, internet • Mass mailings, seminars 6
The Securities Act in Brief: Key Questions • Interaction with state “blue sky” laws – Pre- emption for “covered securities” under NSMIA – Onerous “merit review” process • Transferability of Securities – “Restricted Securities” under Rule 144 – Holding periods – Issuer information requirements • Liability – Strict: Securities Act § § 11 and 12 – Scienter-based: Exchange Act Rule 10b-5 7
Old Regulation A • 80 year- old “Scaled Registration” provision • Key Terms: – Up to $5 million per year – Robust offering circular – “Qualification” - SEC review and comment process – General solicitations and advertising permitted – Retail investors permitted without limit – Unrestricted securities – Audited financials not required – No ongoing reporting requirements – STRICT LIABILITY under Section 12 – NO BLUE SKY PRE-EMPTION 8
Old Regulation A • Tremendously unpopular • 19 Regulation A offerings between 2009 and 2012 – 27,500 Regulation D offerings of $5 million or less – 373 Registered Offerings of $5 million or less • Why? – Costly and inefficient – More attractive options, mainly Regulation D – NO BLUE SKY PRE-EMPTION – Market liquidity was an illusion 9
Regulation A+: Overview • JOBS Act replacement for Regulation A • Effective June 2015 – Early returns are not especially promising • Two Tiers – Tier One: Currently up to $20 million per year – Tier Two: Currently $20 to $50 million per year – Voluntary Tier Two compliance permitted • Requirements and benefits differ by tier 10
Regulation A+: Tier One • Tier One – Currently up to $20 million – Otherwise very similar to old Regulation A • Key Provisions: – Offering Circular: informal, Q&A format permitted – SEC review and comment process – General solicitations permitted – Retail investors permitted without limit – Unrestricted securities – Audited financials not required – No ongoing reporting requirements – STRICT LIABILITY under Section 12 of the Securities Act – NO BLUE SKY PRE-EMPTION 11
Regulation A+: Tier Two • Tier 2 – Currently $20 to $50 million – Otherwise, very close to full registration • Key Provisions – Robust, S-1 equivalent offering circular – SEC review and comment process – General solicitations permitted – Retail investors subject to personal volume limitations – Unrestricted securities – Audited financials required – Ongoing periodic and current reporting – STRICT LIABILITY of the Securities Act – FULL BLUE SKY PRE-EMPTION 12
Regulation A+: Tier Two • Investor volume limit – Applies to investors who are not accredited – Per offering limit equal to the greater of: • 10% of the investor’s net worth • 10% of the investor’s annual income • Ongoing reporting • Estimated costs – $400,000 for offering – $200,000 annual compliance 13
Regulation A+: Who’s Using It? • SEC Division of Economic and Risk Analysis (DERA) Study • 81 offerings qualified as of 10/31/2016 • Average size – Tier One: $700,000 – Tier Two: $26 million • Virtually all “best efforts” • Under 20% underwritten • 60% pre-revenue issuers; nearly 90% no net income • Plurality Real Estate/REIT • 120 day average time to qualify 14
The FAST Act: Overview • What is the FAST Act? – Fixing America’s Surface Transportation Act (the “FAST Act”) signed into law by President Obama on December 4, 2015 • What does it do? – Primary purpose: provide long-term funding certainty for surface transportation – Also made several changes to the federal securities laws – Provided a safe harbor for the “Section 4(a)(1½)” Exemption 15
The FAST Act: “Section 4(a)(1½)” Exemption • Resale Exemptions before the FAST Act: – Section 4(a)(1) – “Ordinary Trading” Exemption – Rule 144A – Exemption for “Qualified Institutional Buyers” (QIBs ) • “Section 4(a)(1½)” – Private Resale Exemption – Developed over time by securities professionals and discussed in case law – Relies on elements of Section 4(a)(1) and Section 4(a)(2) – Requirements: • Sophisticated investors (e.g., accredited investors) who would have been eligible to purchase such securities directly from the issuer • Comply with rules typically prescribed for Section 4(a)(2) or Regulation D private placements by issuers – Restrictions vary based on issuer, nature of investors, and size of the offering 16
The FAST Act: Section 4(a)(7) • FAST Act added Section 4(a)(7) exemption • Nonexclusive safe harbor for private resales under the “Section 4(a)(1½)” exemption – Similar to Rule 506 of Regulation D operating as a safe harbor for Section 4(a)(2) exemption • Exemption available for private resales of restricted securities to “accredited investors” where no general solicitation or advertising is used and certain information concerning the issuer and the transaction is provided to the purchaser 17
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