Offerings under Regulation A

Regulation A represents an exercise by SEC of its authority under section  3(b) of the Securities Act to exempt offerings of securities from  registration if it finds that registration “is not necessary in the public  interest and for the protection of investors by reason of the small amount  involved or the limited character of the public offering….” SEC has  previously stated that the primary purpose in adopting Regulation A was  to provide a simple and relatively inexpensive procedure for small  business use in raising limited amounts of needed capital. A business  that relies on Regulation A must (1) file for SEC staff review an offering  statement that includes an offering circular and financial statements, and  (2) provide the offering circular to investors. We discuss the review process in more  detail later in this report. While  these laws can vary from state to state, they require securities issuers  (including businesses making small offerings) to register their offerings  with the state before the offerings can be sold in that state unless state  registration for the offering has been preempted by federal law or a state  registration exemption applies. Regulation A Use Has Decreased Since 1997

		Trends in Regulation A Offerings

The number of Regulation A offerings filed and qualified has declined  significantly after peaking in fiscal years 1997 and 1998 respectively (see  fig. However, since 1997, the number of initial Regulation A offerings filed  decreased significantly—from 116 in 1997 to 19 in 2011. The number of  qualified offerings also dropped dramatically after 1998, decreasing from  57 in 1998 to 1 in 2011. Securities attorneys with whom we met stated  that the decrease in filings after 1997 could be attributed to a number of  different factors, including the increased attractiveness of Regulation D.  The National Securities Markets Improvement Act of 1996 preempted  state registration requirements for certain other categories of securities  offerings (including Rule 506 of Regulation D)—potentially making these  other options more attractive to businesses. Businesses have used Regulation D exemptions and registered initial  public offerings to a greater extent than Regulation A in recent years. More  specifically, staff review filings to determine whether disclosures appear  to be consistent with SEC rules and applicable accounting standards. States’ Methods of Registering Regulation A Securities Offerings Vary

Although states employ a limited number of methods for registering  securities offerings, specific requirements and processes vary. Registration by qualification is similar to a securities registration with  SEC under the Securities Act. Registration by coordination is available to issuers that have  registered their offerings with SEC.copies of their SEC registration statement and any amendments with  the state agency for review. Under this method, issuers file  While all states conduct disclosure reviews of Regulation A securities  offerings, most states also conduct merit reviews. These  factors included the type of investors businesses sought to attract, the  process of filing the offering with SEC, state securities laws, and the cost- effectiveness of Regulation A relative to other SEC exemptions. Views  vary on whether use of Regulation A will increase, with some  stakeholders stating that interest will increase as a result of the $50  million ceiling, and others stating that the requirement for issuers to  register the securities at the state level will continue to deter small  businesses from using the exemption. Factors That May Have Affected Regulation A Use

Multiple factors appear to have influenced whether small businesses used  Regulation A to raise equity capital, according to recent issuers and other  stakeholders with whom we met. Identifying and addressing the securities registration requirements of  individual states is both costly and time-consuming for small businesses,  according to research, an advocate for small businesses, and securities  attorneys with whom we met. For example, we met with  securities attorneys who had experience obtaining Regulation A  exemptions for small businesses. As noted earlier, according to NASAA officials, most states perform merit  reviews. SEC staff stated that for Regulation D, businesses  are required to notify SEC of the offerings, and that SEC does not  generally provide comments on the notifications. Views on Future Growth of Regulation A Filings Were Mixed

The number of small business that seek exemption through Regulation A  may increase as a result of the JOBS Act’s requirement for SEC to  increase the maximum offering amount to $50 million, according to staff  from some state securities administrators’ offices, a small business  advocate, and securities attorneys whom we interviewed. Agency Comments

We provided a draft of this report to SEC and NASAA for their review and  comment. Both provided technical comments, which we incorporated as  appropriate. In its letter, NASAA concurred with our finding that multiple  factors have affected use of Regulation A, and suggested that the primary  reason for its limited use is the “mini-public offering” process that  businesses must complete. As noted in the report, NASAA stated that it will be  working to develop model state registration requirements for the larger  Regulation A offerings allowed under the JOBS Act, and NASAA  suggested that further changes to federal securities laws, particularly  Regulation A, should be withheld until states implement a new system to  address the JOBS Act's changes.
Why GAO Did This Study

Businesses seeking to use public offerings of securities to raise capital must comply with federal and state securities laws. Businesses must register offerings with SEC unless they qualify for an exemption. Regulation A exempts a securities offering that does not exceed $5 million from SEC registration if certain requirements are met. However, businesses still must file an offering statement that includes an offering circular and financial statements with SEC, and SEC staff review filings for consistency with applicable rules and accounting standards. In addition, Regulation A does not exempt offerings from states registration requirements, which are also intended to protect investors. Concerned about the decline in the number of public offerings, the JOBS Act requires SEC to amend Regulation A (or to adopt a new regulation) to raise the threshold for use of that registration exemption from $5 million to $50 million, and requires GAO to study the impact of state securities laws on Regulation A offerings. This report examines (1) trends in Regulation A filings, (2) how states register Regulation A filings, and, (3) factors affecting the number of Regulation A filings and how the number of filings may change in the future. GAO analyzed SEC data related to financial regulatory filings, reviewed published research, and interviewed academics, SEC staff, state securities regulators, and small businesses. SEC and NASAA provided technical comments on a draft copy of this report, which GAO incorporated as appropriate. In its letter, NASAA concurred with our finding that multiple factors have influenced the use of Regulation A.

What GAO Found

The number of Regulation A offerings filed and qualified (that is, cleared) by the Securities and Exchange Commission (SEC) has declined significantly after peaking in fiscal years 1997 and 1998, respectively. In particular, offerings filed since 1997 decreased from 116 in 1997 to 19 in 2011. Similarly, the number of qualified offerings dropped from 57 in 1998 to 1 in 2011. Securities attorneys GAO interviewed suggested that the decrease in filings after 1997 could be attributed to a number of factors, including the increased attractiveness of Regulation D. The National Securities Markets Improvement Act of 1996 preempted state registration requirements for other categories of securities including certain Regulation D offerings, which are also exempt from SEC registration. In contrast, Regulation A offerings are generally subject to state securities laws and must go through a federal filing and review process. In recent years, businesses have used Regulation D and registered public offerings to a greater extent than Regulation A.
States methods for registering and reviewing securities vary. One method used by states is registration by qualification, which is similar to registering securities with SEC, as issuers are required to submit certain documents to the responsible state securities agency for review and approval. All states conduct disclosure reviews of the Regulation A offerings, meaning that they ensure that all material information is disclosed in the offering. According to the North American Securities Administrators Association (NASAA) officials, most states additionally conduct a merit reviewan analysis of the fairness of the offering to investorsalthough some states use stricter standards in their merit reviews than others. NASAA officials have encouraged states to take steps to streamline their requirements and make them more uniform, including adopting a standard form for registering securities. NASAA plans to work with states to determine what changes in their registration methods will be needed in light of the Jumpstart Our Business Startups Act (JOBS Act).
Multiple factors appear to have influenced the use of Regulation A and views vary on whether raising the offering threshold will increase its use. The factors included the type of investors businesses sought to attract, the process of filing the offering with SEC, state securities laws, and the cost-effectiveness of Regulation A relative to other SEC exemptions. For example, identifying and addressing individual states securities registration requirements can be both costly and time-consuming for small businesses, according to research, an organization that advocates for small businesses, and securities attorneys that GAO interviewed. Additionally, another SEC exemption is viewed by securities attorneys that GAO met with as more cost-effective for small businesses. For example, through certain Regulation D filings small businesses can raise equity capital without registering securities in individual states, as long as other requirements are met. State securities administrators, a small business advocate, and securities attorneys with whom GAO met had mixed views on whether the higher maximum offering amount ($50 million) under the JOBS Act would lead to increased use of Regulation A. For example, some thought that the higher threshold could encourage greater use of Regulation A, while others told us that many of the factors that have deterred its use in the past likely will continue to make other options more attractive.