During yesterday’s meeting of the SEC’s Advisory Committee on Small and Emerging Companies, the Committee considered whether to join the growing chorus calling for a ten-fold increase of the Reg A offering limit from its current $5 million to $50 million. In the end, the Committee supported the recommendation. But not without first questioning whether it would do any good.
A brief explanation: Reg A provides an exemption to the registration requirements for offerings of up to $5 million, if pursued in compliance with a number of conditions. Among these is a requirement to file an abbreviated form of offering circular with the SEC and each state in which the offering is made. As Reg A does not preempt state blue sky laws, some states, including Washington, conduct a “merit review” of any Reg A offering made within its borders.
Because of these requirements, Reg A is not, shall we say, “highly trafficked.” The regulatory hurdles make the $5 million “bang for the buck” difficult to pencil; particularly when its far easier to complete a “Reg D” offering (for accredited investors only) in an unlimited amount. It is not surprising, then, to learn that there were only 24 Reg A filings in each of 2009 and 2010, and that only three of those in each year were ultimately qualified.
In recommending to the Commission that it pursue a ten-fold increase to the Reg A limit, the Advisory Board touched on various impediments and, generalizing, voiced strong doubt that any increase in the offering amount alone would be sufficient to invigorate Reg A’s use. Presumably most members (although certainly not the one there on behalf of NASAA) would like to see a preemption of State law for Reg A offerings as well.
But as David Feldman wrote recently on his blog, there is another missing piece that also requires attention. A company that relies on Reg A to issue shares is not a “reporting company,” and therefore its shares cannot be listed on an exchange, much less the OTC Bulletin Board. Without a listing, investors who buy Reg A stock suffer an illiquidity problem due to the absence of an immediately viable secondary market. While their shares can trade on lower-tier over-the-counter markets (and remain subject to state blue sky laws for secondary trading), Mr. Feldman advocates the implementation of a “fast track” system that would smooth the path to full reporting and consequent “uplisting” for these companies.
Manny members of the Advisory Board must have quietly thought so, too.