Among their less heralded innovations, the JOBS Act regulations allow an issuer to make public “shelf” offerings under so-called “Regulation A Plus” – to qualify an offering memorandum with the Securities and Exchange Commission (SEC) now, and then issue the securities later or continue issuing them over a prolonged period.
In the world of public companies and their register
SHELF OFFERINGS UNDER REGULATION “A PLUS
red offerings under the Securities Act of 1933 (the “Securities Act”), shelf registrations have developed into an important capital-raising tool. An eligible company may file a registration statement, work out any disclosure issues with the SEC staff in advance, and then keep the offering “on the shelf” for a period of years, issuing some or all of the securities quickly when capital needs arise or market conditions are favorable. An issuance of shelf-registered securities is called a “takedown.” Shelf registration provides a useful financing vehicle in a number of situations, for example the following:
- A company that does not need money immediately but may need it in the near future, and wants to be able to quickly capitalize on favorable market conditions;
- A company that is considering offering debt securities based on future changes in interest rates;
- A company that expects to grow through acquisition of other businesses and wants relatively quick access to capital to make a purchase when an opportunity presents itself.
Public Companies also typically use a type of shelf registration for their equity incentive plans, registering a pool of stock and then drawing from the pool to issue options or incentive shares when hiring a new employee or awarding annual grants.
Under the Congressional mandate of the JOBS Act, the SEC has issued new regulations to overhaul Regulation A, which became effective on June 19, 2015. The revamped Regulation A, commonly referred to as “Regulation A Plus,” attempts to breathe new life into a long-ignored offering method by allowing a small-scale public offering – up to $50 million within a year– with fewer disclosure and reporting obligations than a full-blown initial public offering, or IPO. In keeping with the concept of a Regulation A offering as a “junior IPO,” the SEC has provided regulations that allow Regulation A issuers to enjoy some of the same benefits provided by shelf registration under the Securities Act. These benefits are added to the already attractive features of making an offering under Regulation A: unlike a private placement, purchasers are not limited to wealthy “accredited investors,” and after sale under Regulation A the securities are freely tradable.
The Regulation A shelf rules may have escaped notice because the regulation uses the more obscure terminology historically used under Rule 415 under the Securities Act, referring to offerings “made on a continuous or delayed basis.” While Rule 251(d)(3) under Regulation A has long allowed for such offerings, it has also required that whenever the issuer’s information changed, the issuer would have to submit an amended offering circular to the SEC for review by the staff and re-qualification, effectively eliminating any benefit of having put the offering on the shelf in the first place.
Under amended Rule 251(d)(3), a company can qualify securities it intends to offer over a future period by submitting a shelf offering circular with the staff and, once it is qualified, can more easily update the offering circular for new information as follows:
- The issuer can provide new information to investors in an offering circular “supplement.” If supplement contains a “substantive” change, it must be filed with the SEC, but not reviewed or qualified.
- The issuer must submit an annual “post-qualification amendment” that includes updated financial statements, and which must be reviewed and qualified.
- Whenever new information results in a “fundamental change” in the offering circular, the issuer must submit a post-qualification amendment to the SEC to be reviewed and qualified. “Fundamental” is a higher standard than “material.”
The original offering circular submitted to the SEC can omit specifics of the offering, such as the final offering price and the identity of underwriters, and the offeror can add this information at the time of the “takedown” (so long as the offering is all-cash and offering prices fall within pre-determined ranges). However the rules provide only a 15-day window to fill in the missing information by filing a supplement – after 15 days a post-qualification amendment and requalification is necessary. In this respect, a Regulation A shelf offering has far less flexibility than a shelf registration – to a degree that could thwart the SEC’s intent to make such offerings an attractive alternative to private placements.
Shelf qualification will be available for the following:
- An offering that will commence two days after qualification and is reasonably expected to be concluded in two years, but may be continued for up to three years from the qualification date and may be extended further by filing and qualifying a new offering statement.
- Secondary offerings – resales – by securities holders
- Securities offered under a dividend or interest reinvestment plan or an employee benefit plan of the issuer
- Securities to be issued on the exercise of outstanding options, warrants or other rights – or on conversion of outstanding securities
The rules allow “primary” shelf offerings – the issuer’s offering of its own securities not based on any pre-existing rights – only in conformity with the first bullet point above. In addition, if an offeror has previously made a Regulation A Tier Two offering, it must be current in its semi-annual and annual reporting obligations to be eligible for a primary shelf offering of any size.
The new rules prohibit so-called “at-the-market” offerings, where the offeror can sell batches of securities into established trading markets at market prices, a tactic often seen in “equity line of credit” offerings. The SEC deemed at-market offerings to be inappropriate for Regulation A issuers, whose securities likely will not be traded on exchanges and are even less likely to trade at volumes that would establish an efficient and stable market price. By way of comparison, a public company must, among other requirements, have $75 million in public float to file for an at-the-market shelf registration.
For registered shelf offerings, the SEC has developed abbreviated registration forms that allow an issuer who meets heightened eligibility standards to incorporate large parts of company information by reference from other SEC filings – and to use subsequent annual, quarterly and current reports to automatically update the registration statement and prospectus without the need to file anything. (And almost all public companies can use this type of abbreviated disclosure for employee stock options and other equity incentives.) While Regulation A issuers generally have lesser disclosure requirements, Regulation A provides its shelf offerors with nothing comparable to the ease of these abbreviated registration forms available to qualified public companies.
The ability to issue securities under employee benefit plans on a shelf basis could be quite useful to fast-growing tech companies. Private companies have generally had to keep their option and incentive plans within the limitations of Rule 701, which limits the total exercise price of options issued in one year to the greatest of $1 million, 15% of assets on the balance sheet, or 15% of outstanding securities – in addition to varying restrictions under state securities laws. Non-public behemoths, like pre-IPO Facebook and Twitter, have bumped up against these limitations. Under the new regulations, a company with audited financial statements could qualify its benefit plan as a Tier 2 Regulation A offering, allowing up to $50 million to be offered and pre-empting state securities requirements. A company without audited financial statements could offer up to $20 million in aggregate exercise/purchase price of incentives, but would continue to be subject to all applicable state securities laws where employees live and work.
The shelf rules for Regulation A open new avenues for capital raising, but they also leave many opportunities for improvement. The utility of the rules will be hampered by the need to requalify annually, the inability to automatically update offering statements with information in annual and semi-annual reports, and the very limited ability to provide specific offering terms by supplement rather a qualified filing. It is difficult to understand how loosening these requirements would lessen investor protection. Regulation A has little history of active use – as “A plus” offerings become more common, perhaps the SEC will consider broadening shelf offerings under the regulation so it can fully deliver on its promise.
As corporate and securities counsel at Homeier & Law P.C. Charles Kaufman ,advises companies in commercial and financial transactions, with an emphasis on raising capital through both established techniques and newly emerging ones like crowdfunding. He also counsels public companies on disclosure and compliance matters, especially those who want their reports and offering documents to communicate effectively with investors rather than merely sedating them. He has helped his clients to create, finance, govern, expand across borders, combine and exit their businesses, and to form strategic alliances, across a broad range of industries, including medical devices, healthcare, software, nanotechnology, film and music production, garment manufacturing, retailing, real estate investment and semiconductors. Charles earned both his J.D. and B.A. degrees at the University of California at Los Angeles. He is a member of the State Bar of California and serves on the editorial board of its International Law Journal.