On June 6, 2016, the OTC Markets Group Inc., the entity operating three major over-the-counter marketplaces (“OTC”), submitted a rulemaking petition to the SEC. The petition asked the SEC to amend Regulation A+ to allow fully reporting companies to utilize the exemption. OTC argues that such a shift in policy would bring the exemption from registration more in line with congressional intent.
Title IV of the JOBS Act mandated the SEC to amend Regulation A to make it a more viable regime for raising capital, most notably by increasing annual raise limitations and making securities sold pursuant to Regulation A “covered securities” exempt from state blue sky laws. The old rules under Regulation A prohibited companies subject to the periodic reporting obligations under Sections 13(a) or 15(d) of the Exchange Act from using the exemption. In its final Regulation A+ rules release, the Commission did not alter these eligibility requirements, noting that it that it would prefer to wait until the Regulation A+ market developed before expanding the scope of issuers authorized to conduct Regulation A+ offerings.
OTC, in its rulemaking petition now asks the Commission to revisit this position. Under the current Regulation A+ eligibility requirements, OTC notes:
Fully reporting issuers seeking to take advantage of the streamlined Regulation A+ offering process face an unfortunate choice: (i) deregister as a fully reporting company and then file Form 1-A, in the process ceasing their more frequent and detailed periodic reporting; or (ii) elect other available options, e.g., a costly full Form S-1 or S-3 registration or a private placement under Regulation D, the latter of which would shut out many of the important individual investors Regulation A+ was designed to include. For those issuers that do not meet the minimum thresholds for Exchange Act deregistration, the Regulation A+ window is completely shut.
The petition also characterizes other capital-raising options available to fully reporting companies (namely PIPEs and the streamlined process available under Form S-3) as sub-optimal choices for small reporting companies.
The entire petition is worth a read for those interested. It is available here. As the number of issuers conducting Regulation A+ offerings increase, it will be interesting to see whether the SEC is persuaded by OTC’s arguments.
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