A recent Securities and Exchange Commission amendment to Regulation A of the Securities Act allows small private companies and non-reporting public companies to raise up to $50 million in capital from regular investors without registering with the SEC. The new rule, mandated under Title IV of the JOBS Act of 2012, has the potential to dramatically expand access to capital for small companies, including banks.
Reg A is a longstanding exemption from SEC registration that allowed companies to raise up to $5 million in any 12-month period from an unlimited number of accredited and unaccredited investors. Under old Reg A, companies were required to submit an offering statement to the SEC for review and to comply with individual state Blue Sky laws, which are intended to protect the public from fraud, before the offering could be recommended or sold to investors in each state.
While Reg A was initially popular with companies--including banks--it’s popularity has since waned due in part to the high cost and complexity of federal and individual state filing requirements and the low offering limit.
Then Congress passed the JOBS Act which among several provisions proposed expanding Reg A to make it work better for small companies. Colloquially referred to as Reg A+, the amended version has done just that by giving companies a choice of two tiers of offerings:
- Tier 1, which allows for offerings of up to $20 million in any 12-month period, with not more than $6 million in offers by selling securities holders that are affiliates of the issuer.
- Tier 2, which allows for offerings of up to $50 million in any 12-month period, with not more than $15 million in offers by selling securities holders that are affiliates of the issuer.
Both tiers are subject to basic requirements as to issuer eligibility, disclosure and other matters, while companies conducting Tier 2 offerings are subject to additional disclosure and ongoing reporting requirements. Companies are also allowed to make confidential filings with the SEC as well as “test the waters” with investors prior to an offering.
Most importantly, companies conducting a Tier 2 offering are exempt from state Blue Sky laws, lifting a significant barrier under old Reg A.
In addition, Reg A+ securities purchased by non-affiliated investors are unrestricted and are freely transferable on day one, a notable difference from exempt offerings more commonly done under Regulation D. This allows companies to obtain a stock symbol and create a public market for its securities almost immediately, providing shareholders access to liquidity.
In anticipation that many Reg A+ companies will go public on the OTC Market Group’s OTCQX Best or OTCQB Venture Markets, we have introduced specific in-boarding requirements for companies wishing to take that route.
Current Status and What It Means for Banks
Since Reg A+ became effective, approximately 35 companies have publicly filed a Form 1-A offering statement with the SEC. That includes at least one bank--First Light Bancorp, the holding company for Commerce Bank in Evansville, Indiana--which has filed to raise up to $10 million in a Tier 1 offering. Additionally, a dozen or more companies are believed to have filed confidentially with the SEC.
Reg A+ expands the opportunities available to small banks looking to raise capital and go public without the burden of SEC registration and Sarbanes-Oxley Act compliance. As a capital raising mechanism, Reg A+ is also uniquely suited to small community and regional banks for several reasons:
- Securities sold under Reg A+ can be offered to unaccredited investors, allowing community banks to leverage their existing relationships with their depositors and community members.
- Banks receive Blue Sky preemption in the states within which they operate, making the Blue Sky requirement in Tier 1 offerings less burdensome.
- Banks are already required to have annual audited financial statements and file quarterly reports with their banking regulator, making it relatively easy for them to comply with the disclosure and audit requirements of a Tier 2 offering.
- Raising capital and going public under Reg A+ does not require companies to immediately register with and report to the SEC, a key concern for small banks that are unwilling to shoulder the costly--and often duplicative--requirements of being an SEC reporting company.