For decades, the Holy Grail for federal legislators has been to develop legislation to stimulate small business growth while finding the balance between too much regulation and too little oversight. While many might compare this quest to a Monty Python sketch, the recently passed, bipartisan Jumpstart Our Business Startups Act (JOBS Act) may do just that by empowering regional investment in businesses across the country.
On April 5, 2012, President Obama signed the JOBS Act, into law. Easy to grasp and more controversial provisions such as crowdfunding or the IPO onramp received the lion's share of attention; however the sweeping amendments to the exemption from public registration under "Regulation A" will mean new and exciting opportunities for financial advisors, investors and issuers in the immediate future.
What is Regulation A and how has it changed?
Regulation A under the Securities Act of 1933, as amended, dates to the 1930s and is promulgated under Section 3(b) of the securities act, which generally permits the Securities and Exchange Commission to exempt classes of securities from registration, so long as the aggregate dollar amount of such securities issued pursuant to a Section 3(b) exemption does not exceed $5 million in any one year. It is important to understand that Regulation A exempts the securities themselves from registration, whereas Regulation D for private offerings only exempts the issuing transaction for securities issued under the exemption, and then only if the manner in which the private offering is conducted complies with Regulation D. Moreover, unlike Regulation A, the availability of Regulation D to insulate the issuer and its offering from the registration requirements of the securities act is dependent on the type of investor purchasing in the offering, and the issuer and the investor complying with significant restrictions on the transfer of the securities purchased.
In short, Regulation A has three significant advantages:
(i) Public solicitation in a Regulation A offering is permitted;
(ii) Securities offered under Regulation A may be offered and sold to non-accredited investors; and
(iii) Securities purchased in a Regulation A offering may be freely traded by investors.
Prior to the JOBS Act, Regulation A failed to gain much attention because of its limitation to $5 million in a 12-month period. The JOBS Act directs the SEC to increase the amount of securities to be sold by an issuer in a 12-month period under Regulation A from $5 million to $50 million.
This will have a profound impact on financial advisors and their clients by providing investment options beyond either highly illiquid, private Regulation D transactions, or the volatility of Wall Street.
The JOBS Act also revises Regulation A by mandating the issuer of securities to file audited financials annually. Title IV requires the SEC to establish electronic filing for Regulations A, and directs the SEC to consider other periodic disclosures.
But how does this impact financial professionals?
For many financial advisors and investors, Regulation D has become a dirty word. The chief reason is that these securities are highly illiquid both from a legal and a market perspective.
Legally, an investor cannot resell securities without either registering them under the 1933 securities act or finding an exemption from registration. This takes time and adds cost.