The House overwhelming passed the Small Company Capital Formation Act, HR 1070, introduced by Rep. David Schweikert (R-AR) to make it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration under Regulation A from $5 million to $50 million. HR 1070 also directs the GAO to conduct a study on the impact of state blue sky laws on offerings made under Regulation A and report to Congress on the results of the study within three months of enactment. HR 1070 encourages small companies to access the capital markets by creating a less burdensome process for raising capital.
Congress believes that smaller companies considering raising capital could benefit from Regulation A because raising capital under a Regulation A exemption is less costly and time consuming than using a conventional IPO subject to reporting and registration requirements.
Section 3 of the Securities Act authorizes the SEC to exempt small securities offerings from registration. Under Section 3, the SEC promulgated Regulation A, which exempts public offerings of less than $5 million in any 12-month period. The SEC set the threshold at $5 million in 1992, where it has remained.
Since the SEC set the Regulation A threshold at $5 million in 1992, issuers and market participants have pointed out that the offering threshold has been too low to justify the costs of going public under Regulation A. In addition, inflation, which has risen approximately 165% since 1980, when Congress gave the SEC the authority to set the Regulation A offering threshold, has further exacerbated the imbalance between costs and benefits. Between 1995 and 2004, companies have used Regulation A only 78 times; in 2010, only three times. According to Congress, the low number of Regulation A filings, each for the maximum amount of $5 million, demonstrates that a revision to Regulation A is necessary. To increase the use of Regulation A offerings and help make capital available to small companies, H.R. 1070 increases the offering threshold to $50 million.
Congress posits that small companies are critical to economic growth in the United States. Amending Regulation A is designed to make it viable for small companies to access capital will permit greater investment in these companies, resulting in economic growth and jobs. By reducing the regulatory burden and expense of raising capital from the investing public, H.R. 1070 will boost the flow of capital to small businesses and fuel America's most vigorous job-creation machine. Regulation A offerings can also help entrepreneurial businesses attract private capital at lower costs than might be feasible in an initial public offering using full SEC registration procedures.
The legislation amends Section 3 of the Securities Act and provides that the SEC must add a class of exempt securities with the following characteristics: the aggregate offering amount of all securities sold within the prior 12-month period in reliance on the exemption must not exceed $50 million; the securities may be offered and sold publicly; the securities must not be restricted securities within the meaning of the federal securities laws; and the securities must be either equity securities, debt securities, or debt securities convertible or exchangeable to equity interests.
The legislation allows the issuer to solicit interest in the offering prior to filing any offering statement, on such terms and conditions as the SEC may prescribe in the public interest or for the protection of investors. The SEC must require issuers to submit an audited financial statement annually.
The legislation also gives the SEC the authority to set forth other terms and conditions for these offerings, which may include a requirement that the issuer of the securities prepare and electronically file with the SEC and distribute to investors an offering statement and disqualification provisions under which the exemption must not be available.
The disqualification provisions must be substantially similar to the disqualification provisions contained in the regulations adopted in accordance with Section 926 of the Dodd-Frank Act.
HR 1070 also subjects Regulation A prospectuses to liability under section 12(a)(2) of the Securities Act.
The legislation allows the SEC to require the issuer to make available to investors periodic disclosures regarding the issuer, its business operations, its financial condition, its corporate governance principles, and its use of investor funds. The legislation also requires the SEC to review the offering amount every two years and to increase the amount as the SEC determines appropriate. If the SEC determines not to increase the amount, it must report to the House Committee on Financial Services and the Senate Banking Committee on its reasons for not increasing the amount.
The legislation exempts securities issued using Regulation A from state securities laws that are offered or sold through a broker or dealer; offered or sold on a national securities exchange; or sold to a qualified purchaser as defined by the SEC.