The Securities and Exchange Commission (SEC) is to be commended for recognizing the debilitating problems with the existing Regulation A, but unless the proposed rule is modified in substantial ways, it will be of only limited value to entrepreneurs seeking to raise capital.
The SEC should:
- Reduce overregulation by state regulators and the SEC, which has destroyed the usefulness of Regulation A (as well as Regulation D Rules 504 and 505).
- Broaden the scope of its qualified purchaser definition—otherwise, Tier I (offerings up to $5 million) will be an illusion and remain just as unhelpful to small business capital formation as Regulation A is currently.
- Resist calls by state regulators to narrow the scope of its qualified purchaser definition and to otherwise over-regulate small business capital formation and entrepreneurship.
- Reduce the regulatory burden on Tier II issuers (between $5 million and $50 million). Given the fact that the proposed Tier II compliance burdens are similar to the burdens imposed on small public companies (although less demanding), it is likely that many issuers will find the proposed rule to be of little value and continue to either use Rule 506 or become a registered (i.e., public) company.
- Reject the proposed investor limitations as inconsistent with the disclosure and fraud prevention principles of federal securities law, having no statutory basis, and inconsistent with congressional intent. The SEC should not get into the business of providing investment advice, it should not mandate that people maintain a particular portfolio, and it should not mandate the level of risk that they may choose to undertake.
- Relax the Securities Exchange Act section 12(g)(1) thresholds for Regulation A offerings. If they are not, then Tier II will be of very limited utility except for small offerings substantially below the $50 million cap, because per-investor sales amounts will have to be extremely high if the current section 12(g) limits are maintained. The interaction of the section 12(g)(1) thresholds and the investor limitations are likely to make offerings anywhere near the $50 million cap simply infeasible. The presumption of SEC staff that broker-dealers will typically hold Regulation A securities in street name, thus reducing the number of holders of record substantially, is entirely unwarranted. The SEC has authority to rectify this problem under section 36 of the Securities Exchange Act.
- It currently takes eight months, on average, to qualify a Regulation A offering. For a start-up business, this is an eternity. If the SEC wants Regulation A to work, then it must, as a management matter, dramatically reduce both the length of time it takes to navigate the qualification process and its complexity.
A more detailed analysis is available in my comments to the SEC regarding the proposed rule. Issues discussed include the economic importance of small business capital formation, the qualified purchaser definition, Tier I offerings and Blue Sky laws, the investment limitation, the section 12(g) triggers, the content of the offering circular and continuing disclosure requirements, qualification, the North American Securities Administrators Association Coordinated Review System, fraud and small issuers, venture exchanges, insignificant or immaterial violations, the testing the waters provisions and confidentiality, and valuation.
