Revision of the Regulation A Offering Process. Regulation A, before the Small Business Initiatives were adopted. permitted a public offering of securities of up to $1.5 million annually without registration provided the issuer met certain conditions. The exemption required that an offering circular containing a narrative disclosure prescribed by Form l-A, similar to the Form S-18, be filed with and reviewed by the SEC. Since Regulation A offerings are exempt from registration, they are not subject to the strict liability provisions of Section 11 of the Securities Act, and do not bring the issuer within the reporting requirements under Section 15(d) of the Exchange Act. However, Regulation A offerings are subject to the civil antifraud provisions in Sections 12 and 17 of the Securities Act and Section 10(b) and Rule l0b-5 under the Exchange Act.
The four principal revisions to Regulation A are: 1) an increase in the dollar ceiling; 2) the disclosure requirements; 3) the 'test the waters' provision; and 4) the substantial compliance provisions.
• Dollar Ceiling. The maximum aggregate offering amount in any 12-month period has been increased from $1.5 million to $5 million, including up to $1.5 million in a secondary offering by selling shareholders, provided that no resales by affiliates are permitted if the issuer has not had net income from continuing operations in at least one of its last two fiscal years.
Rule 251(c) provides that a Regulation A offering will not be integrated with any previously completed registered or exempt offering or with any subsequent offering registered under an employee benefit plan, in reliance on Rule 701, or Regulation S under the securities Act, or made more than six months after completion of the Regulation A offering. Issuers of fractional undivided interests in oil, gas or mineral rights, investment companies or blank check companies are not permitted to use Regulation A. As under the previous regulation A, the issuer's securities could not be sold under Regulation A if the company or a controlling person or underwriter is subject to the so-called 'bad boy provisions' enumerated in Rule 262. Under the new rules, Canadian issuers can now use Regulation A. Regulation A is not available to a company that is already subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act.
• Disclosure Requirements. The disclosure requirements are embodied in the offering statement, on Form 1-A. The offering statement consists of three parts: Part I, notification, which includes nine items; Part II, the offering circular (which may be prepared in three alternative disclosure models) and financial statements prescribed by Part F/S; and Part III, exhibits. The offering circular may be prepared in three alternative formats, all of which are available to corporate issuers, but only the second and third formats are available to non-corporate issuers:
Unless issuers already have audited financial statements, unaudited financial statements are permitted to be filed with the offering circular. All financial statements must be prepared in accordance with generally accepted accounting principles (GAAP). Financial statements shall include a balance sheet and statements of income and expense for each of the two fiscal years preceding the date of the most recent balance sheet.
As under the previous Regulation A, a preliminary offering circular may be used as soon as the offering statement has been filed with the SEC. Rule 255 provides that the preliminary offering circular must contain a 'red herring' legend on the cover page and substantially the information required by Form I-A except that price, discounts and commission information may be left blank.
The final offering circular may be used when it has been 'qualified' by the SEC (equivalent to 'effectiveness' of a registration statement), and subject to similar acceleration provisions. A final offering circular must be delivered to the purchaser not later than the date of confirmation of sale. As in registered offerings, sales within 90 days after the qualification of the offering statement must be accompanied by a copy of the final offering circular.
As under the previous Regulation A, copies of any advertisements or radio or television broadcast scripts must be filed with the SEC when first published or delivered. Also, reports of sales and use of proceeds on Form 2-A are continued under the new rules.
• "Test The Waters"Provision. One of the most innovative changes effected by the Small Business Initiatives is the 'test the waters' provision under Rule 254, which allows issuers to solicit indications of interest from prospective investors before the issuer incurs the expense of preparing the offering circular and financial statements. The issuer may deliver a written document or make scripted radio or television broadcasts. There are no specific content requirements for the written documents, broadcasts or oral communications, but each are subject to the anti-fraud provisions of the federal securities laws. No binding commitment or solicitation or acceptance of money is permitted, and no sale may be made until the offering circular has been qualified by the SEC. The issuer is required to submit a copy of any written document or script of any broadcast with the SEC's regional office on the date of first use. However, failure to file such a written document or script shall not disqualify the exemption.
• Substantial Compliance. Rule 260 under the revised Regulation A provides that insignificant deviations from the Regulation A requirements will not disqualify the offering from the exemption if 1) the failure to comply did not pertain to a requirement intended to protect the particular individual; 2) the failure was insignificant in relation to the offering as a whole (except that any failures to comply with subparagraphs (a), (b), (d)(1) and (3) of Rule 251 shall be deemed to be significant to the offering as a whole, and 3) a good faith and reasonable attempt was made to comply with the requirements.
For issuers that meet the definition of 'Small Business Issuer,' a new registration form, Form SB-2 and an accompanying integrated disclosure system simplifying the reporting requirements under the Exchange Act for such issuers constitute the third major change of the Small Business Initiatives. This system is called the 'Integrated Disclosure System for Registration and Reporting for Small Business Issuers.' All of the provisions relating to registration under the Securities Act and the Exchange Act are set forth in Regulation S-B, which is comparable to Regulation S-K but substantially simplified.
A 'Small Business Issuer' is defined as a company with annual revenues of less than $25 million and 'public float' of $25 million or less. Public float is defined as the aggregate market value of the issuer's outstanding securities held by a non-affiliate, i.e., persons other than officers, directors or significant shareholders. Once a company becomes a Small Business Issuer and enters the disclosure system, the system governs all reports for the remainder of that company's fiscal year.
If a company is a Small Business Issuer, it may register its securities on Form SB-2 for registered offerings under the Securities Act and Form 10-SB for registration of its securities under the Exchange Act. It may use Forms 10-KSB and 10-QSB for its annual and quarterly reports instead of the more complex Forms 10-K and 10-Q provided for regular issuers.
In addition, the integrated disclosure system permits offerings of debt securities up to $10 million for such issuers without full compliance with the Trust Indenture Act. The system is part of a two-tiered system for Small Business Issuers.
Form SB-2 is the designated registration form for registered offerings under the Securities Act for Small Business Issuers. There is no dollar limit for offerings on Form SB-2 and it may be used for both initial and repeat offerings, and for both primary and secondary offerings. The registration statement for the initial public offering may be filed either in the SEC's regional office closest to the issuer's principal place of business or at the SEC's offices in Washington, D.C. All subsequent filings must be made at the Washington office.
The Form SB-2 replaces the Form S-18, which may be used through December 31, 1992. With a few exceptions, the corresponding items of Form SB-2 and Form S-18 are the same; the Form SB-2 items are referenced to Regulation S-B, the new simplified disclosure instructions, whereas the Form S-18 items are referenced to Regulation S-K, the disclosure instructions previously applicable for all registration statements filed under the Securities Act and all reports filed under the Exchange Act.
The financial statement requirements for the Form SB-2 are contained in Regulation S-B, Item 310, which calls for financial statements prepared in accordance with generally accepted accounting principles, including an audited balance sheet as of the end of the issuer's most recent fiscal year, and audited statements of income, cash flows and changes in stockholder equity for each of the issuer's two fiscal years preceding the date of the audited balance sheet. Interim financial statements may be unaudited.
Small Business Issuers are subject to the same basic requirements as regular issuers insofar as filing periodic reports under the Exchange Act is concerned. Thus, even though a Small Business Issuer is not required to register under Section 12(g) of the Exchange Act (because it does not have more than $5 million of total assets and more than 500 stockholders), it may nevertheless be required to file periodic reports under Section 15(d) of the Exchange Act if it registered securities under the Securities Act. However, Regulation S-B, rather than Regulation S-K, will be the applicable instructions for such reports.
The Trust Indenture Act of 1939 was amended by the Small Business Initiatives to increase from $2 million to $5 million the aggregate principal amount of debt securities that may be issued without an indenture within a 12-month period.