Congress today enacted a package of reforms designed to (1) ease the ability to raise capital in private offerings without SEC registration and (2) enable “emerging growth companies” to “go public” with reduced regulatory burdens. Some of the new provisions require SEC rulemaking before they become operative.
Private Capital Access Improvements
- Regulation A Expansion. Companies can currently issue up to $5 million of securities in any 12-month period without SEC registration pursuant to Regulation A. The new law expands the maximum annual issuance to $50 million. Regulation A offerings are subject to state securities laws unless sales are made only to qualified purchasers. An offering memorandum is required along with annual audited financial statements.
- Small Issuer “Assisted” Sales. The new law permits private companies to raise up to $1 million in any 12-month period without SEC registration by using an SEC-registered broker or a newly-created class of SEC-registered “funding portals”. The maximum amount that an individual may invest is capped at ranges from $2,000 to $100,000 depending on the individual’s annual income and net worth. The ability to “sell” represents a significant opportunity for private companies, but certain requirements must be met and securities liabilities will continue to apply.
- Reg D Solicitations Allowed. Companies can currently sell securities on a private basis without registration under the provisions of Regulation D. The amounts, information required, and nature of purchasers varies depending on the amounts raised. However, a significant current restriction is the prohibition on general solicitation or general advertising. That prohibition is now eliminated as long as sales are made exclusively to accredited investors.
- Expansion of Shareholder Caps. A company is currently required to register with the SEC if it has $10 million in assets and at least 500 shareholders. A private company will now be allowed to have up to 2,000 shareholders without registration, as long as no more than 499 shareholders are not accredited investors.
Going Public Enhancements
An “emerging growth company” will be allowed to “go public” without being subject to a number of regulations currently applicable to IPO companies. An emerging growth company is an issuer with less than $1 billion in revenues.
- Limited Audited Information. An emerging growth company need not provide more than two years of audited financial statements or selected financial data. Currently, three years of audited information and five years of selected financial data are required.
- Permitted Communications. IPO companies currently are subject to “quiet periods” which prohibit communications with investors during the registration process. An emerging growth company will now be able to communicate with qualified institutional buyers and institutional accredited investors both before and after filing an IPO registration statement.
- Accounting Standards. Certain accounting standards are applicable to “issuers” under Sarbanes-Oxley, which generally apply to larger and public companies. An emerging growth company will not be required to comply with a financial accounting standard until such standard is generally applicable to companies that are not “issuers”.
- Compensation Reporting. Emerging growth companies will be required to report compensation for only three (rather than five) executive officers and will not be required to provide a “compensation discussion and analysis” or a say-on-pay stockholder vote.