Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, July 3, 2012

GAO: Will JOBS Act Increase Number of Reg A Offerings?

The GAO issued a report on Factors That May Affect Trends in Regulation A Offerings (GAO-12-839, Jul 3, 2012), a timely topic since the JOBS Act increased the cap for Reg A offerings from $5 million to $50 million.  This is what the GAO found:

The number of Regulation A offerings filed and qualified (that is, cleared) by the Securities and Exchange Commission (SEC) has declined significantly after peaking in fiscal years 1997 and 1998, respectively. In particular, offerings filed since 1997 decreased from 116 in 1997 to 19 in 2011. Similarly, the number of qualified offerings dropped from 57 in 1998 to 1 in 2011. Securities attorneys GAO interviewed suggested that the decrease in filings after 1997 could be attributed to a number of factors, including the increased attractiveness of Regulation D. The National Securities Markets Improvement Act of 1996 preempted state registration requirements for other categories of securities including certain Regulation D offerings, which are also exempt from SEC registration. In contrast, Regulation A offerings are generally subject to state securities laws and must go through a federal filing and review process. In recent years, businesses have used Regulation D and registered public offerings to a greater extent than Regulation A.

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Multiple factors appear to have influenced the use of Regulation A and views vary on whether raising the offering threshold will increase its use. The factors included the type of investors businesses sought to attract, the process of filing the offering with SEC, state securities laws, and the cost-effectiveness of Regulation A relative to other SEC exemptions. For example, identifying and addressing individual state’s securities registration requirements can be both costly and time-consuming for small businesses, according to research, an organization that advocates for small businesses, and securities attorneys that GAO interviewed. Additionally, another SEC exemption is viewed by securities attorneys that GAO met with as more cost-effective for small businesses. For example, through certain Regulation D filings small businesses can raise equity capital without registering securities in individual states, as long as other requirements are met. State securities administrators, a small business advocate, and securities attorneys with whom GAO met had mixed views on whether the higher maximum offering amount ($50 million) under the JOBS Act would lead to increased use of Regulation A. For example, some thought that the higher threshold could encourage greater use of Regulation A, while others told us that many of the factors that have deterred its use in the past likely will continue to make other options more attractive.

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If the SEC were to ultimately eliminate the ban on general solicitation/advertising in 506 offerings (as will be discussed in the Sunshine Act Meeting (Item 3) you had linked to earlier in the day) one has to wonder why a company would, thereafter, choose a Reg A offering over a 506 offering. May never happen, but if it did, what happens to Reg A offerings, even with the stepped-up ceiling?

Posted by: Barry Wormser | Jul 3, 2012 2:39:04 PM

My best guess: "many of the factors that have deterred its use in the past likely will continue to make other options more attractive." The required disclosures/filings and Blue Sky regulation can be big costs/barriers here. And with the loosening of the general solicitation provisions for Rule 506 offerings under Regulation D, I would think a lot of issuers would move there. Depending on the crowdfunding regulations, that might be another alternative space as well.

Posted by: Joan Heminway | Jul 4, 2012 7:26:29 AM

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