Private companies raising money shouldn’t get too excited about possible Regulation A reform. You’ll need a registered broker/dealer to sell your Reg. A offering and that won’t happen under this bill’s provisions.
On June 22, 2011, the House Financial Services Committee on Capital Markets and Government Sponsored Enterprises approved the Small Company Capital Formation Act of 2011, as amended. The bill seeks to increase the offering threshold from $5 million to $50 million for public offerings of smaller companies exempt from registration under the Securities Act of 1933 pursuant to Regulation A, another exemption from having to file a full registration statement with the SEC on Form S-1.
But there are certain conditions:
- The Bill provides that the SEC shall require an issuer to file audited financial statements with the Commission annually.
- Each prospectus for securities offered in a Regulation A offering will be treated as a registration statement for purposes of liability under Section 11 of the Securities Act. Currently, an exempt offering pursuant to Regulation A is excluded from Section 11 liability, while remaining subject to the anti-fraud provisions under the federal securities laws. This imposes stricter liability on broker/dealers and others participating in the offering.
- Regulation A offerings would be preempted from state “Blue Sky” review, which is good. But only exempted if such security is (i) offered or sold through a broker or dealer; (ii) offered or sold on a national securities exchange; or (iii) sold to a qualified purchaser.” Not so good.
I also note that issuers in Reg. A offerings are not required to become SEC reporting companies.
Representative David Schweikert (R-AZ), Vice Chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, said: “I am extremely pleased that the Financial Services Committee passed my Small Company Capital Formation Act. This common-sense proposal, passed with bipartisan support, reduces burdensome regulation on small business and creates more jobs. I am glad my colleagues stand with me in unwinding regulation and make our capital markets more vibrant and competitive.”
Huh? Not so fast.
In our experience, this Bill as written will be of no help to most smaller companies. At least the ones I deal with.
I know of no broker/dealer anywhere that will raise money for:
- Any company without significant revenues and profits.
- Any company that is not fully SEC reporting
And imposing Section 11 strict liability on broker/dealers for Reg. A offerings makes it even less likely that they will raise money for your company.
This means that most smaller companies we know will still be subject to state regulation for Reg. A offerings. As we point out in our downloadable e-book, since most states don’t recognize Reg. A offerings, this makes them impractical.
Even if this bill passes, it seems to me like a GoPublicDirect transaction will still be required for most of the qualifying companies that contact me.