The Remarkably Unpopular “Regulation A” Securities Offering

Strip Mall

Good luck finding a strip mall (or anything for that matter) that was financed with Regulation A…

Private placements are investments that typically are offered to a select group of individuals without general advertising.  Your local strip mall might be owned by a limited partnership that raised money by conducting a private placement, often also called a “Rule 506” offering or a “Reg. D” offering.  That strip mall might be owned jointly by a dozen investors who, instead of putting that extra $100,000 in the stock market, chose to invest that money in some real estate where they expect to make a similar or better return on investment.  Same thing for a big apartment complex or any number of startup companies.  Before its IPO earlier this year, Facebook was financed, in part, through a number of private placements.

Private placements can result in big profits, but they are also a useful tool for fraudsters.  As a result, securities offerings, or offerings of ownership interests in businesses, are highly regulated.  Unless an exemption applies, as a technical matter, any offering of ownership interests in a business must be registered with the SEC – in other words, offered as an IPO just like Facebook was.

Of course, as with most regulations, there are a number of exemptions to being required to register your securities offering.   The “Rule 506” and “Reg. D” offerings refer to the most commonly used exemption.

Another available exemption is known as Regulation A.  Offerings under Regulation A generally have three major advantages over Regulation D offerings: (i) the offering can be made to the general public through general advertising, (ii) the offering need not be limited to a select number and type of investor, and (iii) the ownership interests can be freely traded by investors immediately after the offering.  In contrast, Regulation D generally does not allow an offering to the general public, and the ownership interests must be held by the investor for one year before being resold.

Given these advantages, Regulation A sounds very attractive.  However, in 11 years of practice and being involved in a number of private placements, I have seen this exemption discussed, but never seriously considered and certainly never utilized.  A recent study by the Government Accountability Office helps explain why.  While there were 15,500 Regulation D filings in 2010 and 2011 within the $5 million threshold when Regulation A could also have been used, there were only 8 Regulation A offerings during that time!

Though less paperwork is required with a Regulation A offering than a registered offering with the SEC, Regulation A offerings still result in significant paperwork and expense  – investors must be provided an offering circular complying with SEC rules and passing SEC muster, and the offering must comply with complex state laws known as “blue sky” laws, among other things.  When combining these expenses with the $5,000,000 offering limit previously available under Regulation A, very few companies have found this exemption to be useful.

In a bid to increase its usefulness, the recently-enacted JOBS Act will increase the Regulation A offering limit from $5,000,000 to $50 million.  However, the JOBS Act also removes Regulation D’s prohibition on certain forms of general advertising if the offering is solely to accredited investors, making a Rule 506 offering even more attractive.

The SEC currently is tasked with amending Regulation A.  Our firm looks forward to conducting its first Regulation A offering.  I have a feeling we will be waiting a long time…

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