So Far, So Good—Regulation A Amendments Spur Market Activity

SEC SealAmended Regulation A is a hit with issuers, according to a recent Securities and Exchange Commission staff report, but still lags far behind offerings made under Regulation D. Since the changes to Regulation A became effective in June 2015, through October 2016, companies have publicly filed 147 offering statements seeking to raise up to approximately $2.6 billion. The SEC has approved, or qualified, approximately 81 offerings seeking to raise up to approximately $1.5 billion. Anzhela Knyazeva, a financial economist in the SEC's Division of Economic and Risk Analysis, and an assistant professor of finance at the University of Rochester, performed the study.

The June 2015 amendments expanded Regulation A into two tiers, with Tier 1 covering offerings of up to $20 million, and Tier 2, for offerings of up to $50 million. Tier 2 provides for the preemption of state securities laws securities offered or sold to “qualified purchasers,” while Tier 1 offerings remain subject to state registration and qualification requirements. Tier 2 offerings are also subject to other provisions, including requirements to provide audited financial statements and to file annual, semiannual and current event reports. To date, Tier 2 offerings have accounted for 60 percent of qualified offerings.

The vast majority of all Regulation A offerings during the study period involved equity. Stock offerings made up more than 85 percent of offerings filed under amended Regulation A. Most of the issuers had previously engaged in other private offerings, and generally conducted the Regulation A offerings on a best-efforts, self-underwritten basis.

The average issuer sought to raise up to approximately $18 million, and all issuers sought to raise a total of $2.6 billion.  By comparison, in the 12 months ending June 18, 2015, there were approximately 51 filings seeking to raise up to a total of approximately $159 million, including 12 qualified filings seeking to raise up to approximately $34 million.

Despite this growth in activity, however, Regulation A offerings pale by comparison to the Regulation D market. While the $2.6 billion in Regulation A activity is significant, according to a 2015 SEC staff study, there were more than 33,000 Regulation D offerings that raised $1.3 trillion in 2014. Dr. Knyazeva stated that this gap may be attributable to the relatively recent adoption of the Regulation A amendments, and issuer preferences for better-established offering methods, such as Regulation D. The growth of Regulation A market may also be hampered by the availability of alternative sources of financing, including crowdfunding and low-interest bank loans, as well as by the costs and time required to initiate an offering.

Dr. Knyazeva noted that approximately 54 percent of all offerings and 65 percent of SEC-qualified offerings were made on a delayed or continuous basis.  In a continuous offering, issuers have more flexibility in extending the offering based on market conditions and issuer financing needs, without having to incur the cost and time of initiating and completing a new qualification process. Issuers in continuous offerings may file offering circular supplements instead of amendments for certain changes, which results in potentially greater flexibility of the offering process.

Continuing the pattern of offerings in general, Tier 2 offerings accounted for most of the continuous offerings, with at least 77 percent of Tier 2 offerings made on a delayed or continuous basis. In comparison, approximately 30 percent of Tier 1 filings involved continuous or delayed offerings.

The study found that a significant majority, approximately 80 percent, of all offerings did not involve testing-the-waters. Once again, Tier 2 offerings accounted for the majority of testing-the-waters solicitations, as 33 percent of Tier 2 offerings involved testing-the-waters solicitations, while only four percent of Tier 1 offerings did. Dr. Knyazeva posited that this gap may be attributable to the disparate treatment of Tier 1 and 2 offers under state law. State restrictions can limit a Tier 1 issuer’s ability to solicit investor interest without having qualified the offering with all states where an issuer’s solicitation may reach investors.

The SEC also appears to be handling the filing of Regulation A offering statements in an efficient fashion. For offerings that have been qualified, the median time from initial public filing to qualification has been 78 days under the amended rules. Regulation A filings took an average of 228 days to qualify from 2002 through 2011, and during the period from 2012 through 2014, the average time to qualification exceeded 300 days.