Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC Office of Municipal Securities has issued interpretive guidance to address questions from market participants regarding the implementation of new final SEC rules requiring municipal advisors to register with the SEC.

The staff guidance, in the form of answers to frequently asked questions, or FAQs, covers topics including:

  • the advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters
  • the request for proposals-request for qualifications exemption
  • the exemption for independent municipal advisors
  • the exclusion for registered investment advisers
  • the underwriter exclusion, including engagements as underwriters
  • issuance of municipal securities and post-issuance advice
  • remarketing agent services
  • opinions by citizens in public discourse
  • the effective date of the final rules and the compliance period for using the final registration forms

Advice Standard–General

As to the advice standard, the SEC noted the focus of the advice standard in the final rules is whether or not, under all the relevant facts and circumstances, the information presented to a municipal entity or obligated person is sufficiently limited so that it does not involve a recommendation that constitutes advice. In other words, the determination of whether a person provides advice under the advice standard for municipal advisor registration purposes generally involves whether the person makes a recommendation. In the adopting release, the SEC stated “for purposes of the municipal advisor definition, the Commission believes that the determination of whether a recommendation has been made is an objective rather than a subjective inquiry. An important factor in this inquiry is whether, considering its content, context and manner of presentation, the information communicated to the municipal entity or obligated person reasonably would be viewed as a suggestion that the municipal entity or obligated person take action or refrain from taking action regarding municipal financial products or the issuance of municipal securities.”

Examples of the General Information Exclusion from Advice

The staff believes that a person could rely on the general information exclusion from advice under the final rules when providing a municipal entity or obligated person with information that does not involve a recommendation, such as factual information that does not contain subjective assumptions, opinions, or views. Examples of this type of general information include:

  • information regarding a person’s professional qualifications and prior experience (e.g., lists, descriptions, terms, or other information regarding prior experience on completed transactions involving municipal financial products or issuances of municipal securities);
  • general market and financial information (e.g., market statistics regarding issuance activity for municipal securities or current market interest rates or index rates for different types of bonds or categories of credits);
  • information regarding a financial institution’s currently-available investments (e.g., the terms, maturities, and interest rates at which the financial institution offers these investments) or price quotes for investments available for purchase or sale in the market that meet criteria specified by a municipal entity or obligated person;
  • factual information describing various types of debt financing structures (e.g., fixed rate debt, variable rate debt, general obligation debt, debt secured by various types of revenues, or insured debt), including a comparison of the general characteristics, risks, advantages, and disadvantages of these debt financing structures; and
  • factual and educational information regarding various government financing programs and incentives (e.g., programs that promote energy conservation and the use of renewable energy).

In addition, the staff believes that information that is particularized to the municipal entity or obligated person in limited respects could be consistent with the general information exclusion from advice, provided that the information is factual in nature and does not contain or express subjective assumptions, opinions, or views, or constitute a recommendation. For example, the staff believes that a person could provide general market information regarding a municipal entity’s particular outstanding bonds, such as current market prices and yields, without this information constituting a recommendation.

Potential Implied Recommendations

The staff further believes, however, that information that is particularized in more than the limited respects described above in the immediately preceding paragraph to a municipal entity or obligated person potentially could imply a recommendation that could constitute advice under the final rules, depending on all of the relevant facts and circumstances. The more individually tailored the information is to a specific municipal entity or obligated person or group of municipal entities or obligated persons that share similar characteristics, the more likely the information will be considered to be a recommendation. For example, if a person provided information regarding debt financing structuring options that was tailored to address the specific needs, objectives, or circumstances of a municipal entity or obligated person, such as information tailored to address particular fiscal needs or to incorporate particular revenue projections, the staff believes that presenting these particularized options likely would suggest a preferred financing approach that likely would imply a recommendation.

Effect of Disclosures and Disclaimers on Advice Analysis.

The staff believes that disclosures and disclaimers regarding a person’s intentions in providing information to a municipal entity or obligated person are factors that bear upon whether or not the person’s communications would be a recommendation that constitutes advice under the final rules. The staff believes that the following disclosures and disclaimers, clearly and conspicuously stated, in written materials that accompany communications to a municipal entity or obligated person, would be factors that weigh against treatment of information as a recommendation that constitutes advice:

  • this person is not recommending an action to the municipal entity or obligated person;
  • this person is not acting as an advisor to the municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to the municipal entity or obligated person with respect to the information and material contained in this communication;
  • this person is acting for its own interests; and
  • the municipal entity or obligated person should discuss any information and material contained in this communication with any and all internal or external advisors and experts that the municipal entity or obligated person deems appropriate before acting on this information or material.

Effect of Overall Course of Conduct on Advice Analysis

The staff further believes that, while the presentation of information with the disclosures and disclaimers described above are factors that suggest that a person may not be making a recommendation that would constitute advice under the final rules, such disclosures and disclaimers are not controlling and must be considered in the context of a person’s overall course of conduct, taking into account all of the relevant facts and circumstances. Thus, any actions or communications that are inconsistent with these disclosures and disclaimers or inconsistent with the arm’s length nature of a non-advisory business relationship between a person and a municipal entity or obligated person could suggest that the person is making a recommendation and acting as a municipal advisor, which, absent an available exemption, would require registration with the SEC as a municipal advisor.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

We have explained that the District Court upheld the SEC’s conflict minerals rules.  Recently, oral argument on the appeal was heard by the U.S. Court of Appeals for the District of Columbia Circuit.  Some press reports have speculated because of tough questioning by the appellate panel that the appeals court may invalidate the law.  It’s a lot to read into the tea leaves though.  See TheCorporateCounsel.net, eenews, Compliance Week, Main Justice (now defunct) and The Hill.

One of the principal objections to the rule is the cost of compliance.  The best explanation of why the law was enacted I have seen can be found here, which includes a discussion about an announcement by a major manufacturer of conflict minerals free products.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC staff has issued a report on the examinations conducted by the staff  under Section 15E(p)(3) of the Securities Exchange Act of 1934.  The Exchange Act requires the SEC Office of Credit Ratings, or OCR, to conduct an examination of each nationally recognized statistical rating organization, or NRSRO at least annually.  The Exchange Act also requires the SEC to make publicly available an annual report summarizing:

  • the essential findings of all Section 15E examinations, as deemed appropriate by the SEC;
  • the NRSROs’ responses to any material regulatory deficiencies identified by the SEC; and
  • whether the NRSROs have appropriately addressed the recommendations of the SEC contained in previous annual reports on examinations.

The most recent annual report acknowledges that NRSROs have implemented compliance improvements and have taken steps toward improving compliance since Section 15E exams began in 2010. For future examinations, the staff will continue to refine its risk assessment to ensure a balance between verifying compliance with key laws and regulations and identifying and examining emerging risk areas.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The controversy continues around the proposed SEC rules that would require a Form D be filed prior to commencing a general solicitation.  Recently, seven senators sent this letter to SEC Chair Mary Jo White supporting the proposed amendments, stating they were needed by state securities regulators to protect investors (hat tip Jim Hamilton).

Brok Romanek at TheCorporateCounsel.Net also indicated the tide may be turning, noting that SEC Commissioner Aguilar and Senator Levin have weighed in supporting the proposals.

For other information on the JOBS Act, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

On January 2, approximately three years after the applicable deadline under the Dodd-Frank Act, the Federal Energy Regulatory Commission and Commodity Futures Trading Commission entered into two Memoranda of Understanding regarding high level procedures for: (1) resolving jurisdictional issues between the two agencies and (2) sharing information of mutual interest.

I. Jurisdictional MOU

The Jurisdictional MOU establishes high-level procedures for FERC and the CFTC to: (1) apply their respective authorities effectively and efficiently, (2) resolve conflicts concerning overlapping jurisdiction and (3) avoid conflicting or duplicative regulation. Accordingly, the two agencies agreed that:

1. They will notify and consult with staff of the other agency when considering an authorization or exemption with respect to a market participant that may fall within the jurisdiction of the other agency.
2. The notified agency will promptly advise the notifying agency whether it believes it has any interest in the matter.
3. On matters of mutual interest, the agencies will cooperate to develop an approach that meets both agencies’ regulatory concerns.

FERC and CFTC discord has escalated in recent years as FERC sought broad authority to issue civil penalties to individual futures market traders (the Brian Hunter case). In March of 2013, the U.S. Court of Appeals rejected FERC’s arguments that it had authority to levy a $30 million fine and clearly stated that the Commodity Exchange Act vested exclusive jurisdiction to the CFTC over futures markets.

II. The Information Sharing MOU

The Information Sharing MOU establishes procedures for the two agencies to share information and coordinate information requests in connection with market surveillance and investigations of manipulation, fraud and market power abuse. To enhance coordination and avoid duplicative information requests, the MOU provides that FERC will direct requests for information from designated contract markets (e.g., NYMEX), swap execution facilities (e.g., ICE Swap Trade), derivatives-clearing organizations or any other board of trade, exchange, derivatives market or swap data repository (i.e., entities generally under CFTC jurisdiction) to the CFTC. Likewise, the CFTC has agreed to direct requests for information from Regional Transmission Organizations, Independent System Operators, independent market monitors, the North American Electric Reliability Corporation, or interstate pipelines or storage facilities (i.e., entities generally under FERC jurisdiction) to FERC. Both agencies agreed to take all steps necessary to promptly obtain and furnish responsive information to such requests, subject to confidentiality requirements. If implemented as envisioned, the Information Sharing MOU should improve the efficiency of investigations for agencies and market participants alike and improve the agencies’ information gathering abilities with respect to market participants’ activities in related markets outside each agency’s traditional purview.

Check dodd-frank.com frequently for updated information on the the Dodd-Frank Act, the JOBS Act and other important derivatives and securities law matters.

The CFPB has issued a report pursuant to Section 1017(e)(4) of the Dodd-Frank Act to the Committees on Appropriations of the United States Senate and House of Representatives.  The report covers the time period from August 1, 2012 through September 30, 2013, the end of the CFPB’s fiscal year.  The report includes a broad overview of the CFPB’s activities during the relevant time period, and sets forth consumer resources, together with supervision, enforcement and fair lending activities and budget and hiring practices.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

The SEC has adopted amendments (here and here) to eliminate references in certain of its rules and forms to credit ratings by nationally recognized statistical rating organizations, or NRSROs.

The changes were required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and remove credit rating references from:

  • Rule 5b-3 under the Investment Company Act — a rule that permits funds to look through repurchase agreements to the underlying collateral securities for certain counterparty limitation and diversification purposes provided the collateral meets certain credit quality standards
  • Forms N-1A, N-2, and N-3 — forms that contain requirements for funds to report information about their activities to shareholders, including information about the credit quality of their portfolios
  • Rule 15c3-1 (and certain appendices) under the Securities Exchange Act of 1934 — a rule that requires broker-dealers to maintain more than a dollar of highly liquid assets for each dollar of liabilities, which helps ensure that if the broker-dealer fails, it will have sufficient liquid assets to cover its liabilities
  • Rule 15c3-3 under the Securities Exchange Act of 1934 — a rule that prohibits broker-dealers from using customer securities and cash to finance the firm’s own business.  By segregating customer securities and cash from the firm’s proprietary business activities, the rule increases the likelihood that customer assets will be readily available to be returned to customers if the broker-dealer fails.
  • Rule 10b-10 under the Securities Exchange Act of 1934 — the SEC’s confirmation rule that generally requires broker-dealers effecting transactions for customers in securities other than U.S. savings bonds or municipal securities to provide those customers with written notification of the terms of the transaction at or before the completion of the transaction.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

As we’ve described previously, new Rule 506(d) imposes a number of bad actor disqualifications on certain persons that are associated with the issuer, including officers, directors, and 20% beneficial owners.  On January 3, 2014, the SEC released a new set of C&DIs relating to 20% beneficial owners.  Here is what we learned from this latest round of FAQs:

Issuers will need to perform due diligence on any person that is going to become a 20% beneficial owner in an offering, because it will impact the remainder of the offering.  For example, assume that there is an active Rule 506 offering pursuant to which the issuer is holding periodic closings.  An existing 15% shareholder subscribes to purchase shares in the offering that, upon the initial closing, will make her a 20% beneficial owner.  Although Rules 506(d) and 506(e) don’t apply to the shareholder for purposes of the transaction that makes her a 20% beneficial owner, they DO apply to each subsequent sale in the offering (i.e., each subsequent sale can be tainted by the bad acts of the now-20% owner).  This scenario is not likely to be a common one, but it’s something that issuers should keep in mind nonetheless.

The term “beneficial owner” in Rule 506(d) will be interpreted the same way that the term is defined for purposes of Exchange Act Rule 13d-3.  In other words, beneficial ownership consists of the direct or indirect possession, including shared possession, of voting power and/or investment power.  The provisions of Rule 13d-3 relating to when a person will and will not be deemed to be the owner of a security for purposes of determining beneficial ownership therefore also apply in the context of Rule 506 (e.g., a person with a right to acquire securities exercisable within 60 days is deemed to be the beneficial owner of those securities).  Likewise, both direct and indirect beneficial ownership are relevant for purposes of Rule 506, just as they are for purposes of Rule 13d-3, so it is necessary to look through entities – perhaps multiple layers of entities – in order to determine who the ultimate beneficial owners are.

Beneficial ownership of group members and groups will be analyzed under the same principles that apply under Exchange Act Rules 13d-3 and 13d-5(b).  If shareholders enter into a voting agreement, they have thereby formed a group, and the group will be deemed to beneficially own all of the shares beneficially owned by each group member.  If that aggregation exceeds 20%, then the group itself, as a distinct entity, is subject to Rule 506(d) and Rule 506(e).  On the other hand, the individual group members will only be deemed to beneficially own those shares over which they have voting power.  If a shareholder has ceded voting power over shares, those shares will not be attributed to her; if a shareholder has accepted voting power with respect to the shares of the other group members, those shares will be attributed to her, and could lead to her becoming subject to Rules 506(d) and 506(e).

C&DI 260.32 is a brain teaser that may have little practical application. Rule 506(d)(2)(iii) provides that a prohibited act or condition applicable to a covered person for purposes of Rule 506(d) will not affect the issuer “If, before the relevant sale, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing (whether contained in the relevant judgment, order or decree or separately to the Commission or its staff) that disqualification under paragraph (d)(1) of this section should not arise as a consequence of such order, judgment or decree.”  However, even if an issuer has received one of these orders, if any conduct that initially gave rise to the order occurred prior to September 23, 2013, then the disclosure obligation in Rule 506(e) still applies (which requires disclosure of prior conduct that would have violated Rule 506(d) if the rule had been in effect at the time of the conduct).  The post-September 23, 2013 order does not change the fact that conduct occurred prior to September 23, 2013 that would have constituted a violation of Rule 506(d) at that time if Rule 506(d) had then applied.  The Commission further provides, though, that if there were a pre-September 23, 2013 order relating to conduct that could require disclosure under Rule 506(e), a post-September 23, 2013 regulatory authority could determine that the pre-September 23, 2013 order would not have constituted a violation of Rule 506(d), thereby eliminating the Rule 506(e) disclosure requirement with respect to the pre-September 23, 2013 order.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The first half of 2014 will bring changes to the end user reporting requirements for trade options and swaps—namely, (1) the commencement of the annual Form TO reporting requirement for unreported trade options and (2) a reduced time period for reporting swaps to a swap data repository if an end user (non-swap dealer/major swap participant) is the reporting counterparty.

Trade options are commodity options in which:  (1) the offeror and offeree are both producers, processors or commercial users of, or merchants handling, the subject commodity and are entering into the transaction solely for purposes related to their business (alternatively, this prong can be satisfied with respect to the offeror if the offeror qualifies as an “eligible contract participant”); and (2) the parties intend to physically settle the transaction if the option is exercised.  Under the new reporting requirement, trade options that were entered into after April 10, 2013, and were not reported to a swap data repository must be reported to the CFTC on Form TO by March 1, 2014.  Filers of Form TO report the aggregate amount of unreported trade options exercised during the previous calendar year by swap category (energy, metals, agriculture and other) and amount ($0, $0 to $10 million, $10 million to $100 million and over $100 million).

Beginning April 10, 2014, end user reporting counterparties’ deadlines for reporting swaps to a swap data repository will be reduced from within 48 business hours of execution/confirmation to within 36 business hours of execution/confirmation.

On December 18, 2013, the SEC published its proposal to modify Regulation A.   The SEC is proposing to expand Regulation A into two tiers:  Tier 1, for offerings of up to $5 million; and Tier 2, for offerings of up to $50 million.  The proposed rules also seek to modernize the Regulation A filing process to create additional flexibility and streamline compliance for Regulation A issuers.  This post provides an overview of the key provisions of the SEC’s proposal. 

I.  Scope of Exemption

Eligible Issuers

The SEC is proposing to retain the existing issuer eligibility requirements that companies be organized in, and have their principal place of business inside, the United States or Canada.  Under the proposal, the exemption would not be available to the following companies:

  • Exchange Act reporting companies (existing exclusion);
  • Investment companies (existing exclusion);
  • Blank check companies (existing exclusion);
  • Issuers disqualified under the “bad actor” provisions of Rule 262 (existing exclusion);
  • Issuers of fractional undivided interests in oil or gas rights or other mineral rights (existing exclusion);
  • Issuers that have not filed with the SEC ongoing reports during the two years immediately preceding the filing of a new offering statement (new exclusion); or
  • Issuers that are the subject to an order by the SEC denying, suspending or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement (new exclusion).

Eligible Securities

Under the proposed rules, Regulation A would apply to offerings of equity securities, debt securities and debt securities convertible or exchangeable into equity interests, including any guarantees of such securities.  Asset-backed securities will remain ineligible for Regulation A offerings.

Offering Limitations and Secondary Sales

  • Tier 1 (same as existing offering) – Up to $5 million with no more than $1.5 million by selling securityholders
  • Tier 2 – Up to $50 million with no more than $15 million by selling securityholders

The proposed rules eliminate the limitations on affiliate resales where the issuer had no net income from continuing operations in at least one of its last two fiscal years. 

Investment Limitations

The proposed rules contain new investment limitations.  For a Tier 2 offering an investor is limited to purchasing securities with a purchase price of no more than 10% of the greater of the investor’s annual income and net worth.  Issuers would not be required to verify individual income and net worth and could rely on investor representations of compliance.

II.  Offering Statement

The proposed rules update Regulation A to require electronic filing of offering statements on the EDGAR System.  A From 1-A would be developed that is a fill-in-the-blank form similar to Form D and then other disclosure documents and exhibits would be attached.  Ongoing reports would also be filed electronically.  The SEC is also proposing an access equals delivery model for Regulation A final offering circulars.  The SEC also proposes to allow the non-public submission of draft offering statements by issuers of Regulation A securities.

The SEC Proposes to maintain Form 1-A’s existing three-part structure – Part 1 (Notification, Part II (Offering Circular), and Part III (Exhibits).  Part I would be updated to be an online XML-Based fillable form that would be publicly available on EDGAR but not otherwise required to be distributed to investors.  Part II would be updated to eliminate Model A (the Q-and-A format) as a disclosure option and to update and retain Model B as a disclosure option and to continue to permit issuers to rely on Part I of Form S-1 to satisfy the disclosure obligations of Part II of Form 1-A.  The primary update to Model B would be to propose disclosure similar to that of smaller reporting companies.  The proposed rules would maintain the existing financial statement requirements for Tier 1 Offerings but require issuers in Tier 2 to include audited financial statements.

III.  Testing the Waters

The SEC’s professed approach to the proposed rules relating to testing the waters (solicitations of interest for an offering before the commencement of the offering) was based on the idea that the current regulations are inconvenient at best, especially for smaller issuers, and that even for larger issuers the current rules don’t work as well as they could or should.  The Commission’s proposals relating to testing the waters are most easily described by reference to applicable current requirements:

  • Rule 254 currently requires that issuers must submit all materials used in test-the-waters solicitations to the SEC no later than the date the materials are first used; under the proposed rules, the materials need only be filed with the initial public filing or filing for non-public review, thus eliminating the filing requirement altogether for issuers that test the waters and, as a result, elect not to pursue an offering. 
  • Current Rule 254 prohibits sales until 20 days after the last use or publication of materials in test-the-waters solicitations; the proposed rules would excise this provision and add a provision requiring that at least 21 calendar days must pass between the filing of the preliminary offering circular and qualification of the offering.
  • Current Rule 254 requires issuers to cease testing the waters after the filing of the preliminary offering statement; under the proposed rules, test-the-waters solicitations would be permitted both before and after the initial filing.  Solicitations after the filing of a preliminary offering statement would need to include either a copy of the current preliminary offering circular or a URL to the current preliminary offering circular.  In addition, issuers would be responsible for providing material offering circular updates to the recipients of test-the-waters solicitations, but those updates could be provided via distribution of a URL.

IV.  Regulation A Reporting Obligations

Reduced Reporting for Tier I Issuers

Tier I issuers will be required to file certain summary information about the Regulation A offering on Part I of new Form I-Z within 30 days after the completion or termination of the Regulation A offering.  This is actually a reduction in the reporting burden for Tier I issuers, as the current rules require similar information to be reported every six months after qualification and within 30 days after termination or completion of the offering.

Annual, Semi-Annual, and Current Reports for Tier II Issuers

Under the proposed rules, Tier II issuers would be required to file four types of reports: an annual report on Form 1-K, a semi-annual report on Form 1-SA, a report of certain updates on  Form I-U, and a report notifying the Commission of the termination of ongoing reporting obligations on Form I-Z.  Each of the reports is briefly described below:

  • Form 1-K: There are two parts to proposed Form 1-K.  Part I consists of the summary offering information that is already required of Regulation A issuers under Form 2-A, which will be retired.  Part II consists of narrative disclosure about the issuer’s business operations, related party transactions, beneficial ownership of securities by insiders, identities and bios of officers, directors, and key employees, executive compensation data, and MD&A of the issuer’s liquidity, capital resources, and results of operations.  In addition to the narrative disclosure, Part II of Form 1-K also requires two years of audited financial statements.  While Part I of Form 1-K is basically a reformatting of information that is already required to be disclosed on current Form 2-A, the requirements of Part II are new requirements not present in current regulation A.  Tier II issuer’s will also use Form 1-K to file audited financial statements for the issuer’s last completed fiscal year, to be filed no later than 120 calendar days after qualification of the offering statement, if the offering statement did not include such financials.
  • Form 1-SA: The semi-annual reports required of Tier II issuers will be similar to Form 10-Q in that they will primarily consist of financial statements and MD&A, but disclosure relating to quantitative and qualitative market risk, controls and procedures, updates to risk factors, and defaults on senior securities will not be required.  In addition, events that would otherwise require a Form 1-U filing (discussed below) can be disclosed on Form 1-SA.  Tier II issuers would also use Form 1-SA to file semi-annual financial statements (which can be unaudited) for the first six months of the issuer’s fiscal year within 90 calendar days after qualification of the offering statement if the offering statement did not include such financial statements.
  • Form 1-U:  Tier II issuers will be required to file current reports of certain types of events on Form 1-U.  This filing is similar to an 8-K filing, and it incorporates certain elements of items 1.01, 1.02. and 2.01 of Form 8-K.  While the trigger for the 8-K depends on materiality, the trigger for Form 1-U depends on a “fundamental change” standard.  Form 1-U must be filed within four business days of the occurrence of the following events: fundamental changes in the nature of the issuer’s business, bankruptcy or receivership, material modification of securityholders’ rights, Changes in the certifying accountant, non-reliance on previous financial statements or audit reports, change in control, departure of key officers, and unregistered sales of 5% or more of outstanding equity securities.  The SEC has anticipated the obvious question: what is a fundamental change?  The Commission is soliciting comments on what exactly should constitute a fundamental change, but provides in the proposing release that fundamental changes would include “major and substantial changes in the issuer’s business or plan of operations or changes reasonably expected to result such changes, such as significant acquisitions or dispositions, or the entry into or termination of a material definitive agreement that has or will result in major and substantial changes to the nature of an issuer’s business or plan of operations.”

Termination or Suspension of Ongoing Reporting for Tier II Issuers

Tier II issuers can elect to terminate their ongoing reporting obligations by filing Form 1-Z, provided that: 1) the issuer has been current on its Regulation A filings for the last three years (or since commencement of Regulation A reporting, if more recent than three years ago); 2) the securities of each class to which the Regulation A offering relates are held of record by fewer than 300 persons; and 3) offers or sales made in reliance on a qualified offering are not ongoing.

Coordination and Effects of Tier II Reporting Regime

Since the ongoing reporting obligations of Tier II issuers are analogous to a miniature version of the Exchange Act reporting requirements, there are several areas where the SEC is soliciting comments relating to coordination or effects of Tier II ongoing reporting under Regulation A.  For example, the Commission wonders whether Regulation A reporting should make an issuer eligible to file the 8-A short form registration statement (currently available to issuers who are already subject to Sections 13 or 15(d) of the Exchange Act) in connection with the registration of securities under Section 12 of the Exchange Act.  In the proposing release, the Commission also wonders about the implication for the satisfaction of broker-dealer obligations under Rule 15c2-11 and the effect of Regulation A reporting when a Tier II issuer becomes subject to Exchange Act reporting.

V.  Insignificant Deviations from a Term, Condition, or Requirements

Although the SEC is not currently proposing any amendments to Rule 260 (which generally provides that an insignificant deviation from a term, condition, or requirement of Regulation A will not result in a loss of exemption), the Commission is soliciting comments on whether the list of Regulation A requirements that are always considered “significant to the offering as a whole” should be altered.

VI.  Bad Actor Disqualification

The SEC proposes to amend Rule 262 to include bad actor disqualification provisions in substantially the same form as recently adopted under Rule 506(d), but without the categories of covered persons specific to fund issuers, which would not be eligible to use Regulation A under the proposal. Under the proposal, offerings that would have been disqualified from reliance on Regulation A under Rule 262 as currently in effect would continue to be disqualified. Triggering events that are not currently covered by Rule 262—namely, the events specified in proposed Rule 262(a)(3) and 262(a)(5)—and that pre-date effectiveness of any rule amendments would not cause disqualification, but would be required to be disclosed on a basis consistent with new Rule 506(e).

VII.  Relationship with State Securities Laws

The proposal provides that offers and sales of Tier 2 securities under revised Regulation A would preempt state blue sky requirements.  Only offers of Tier 1 securities would preempt state blue sky requirements.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.