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SEC Announces Revised Rules for Smaller Securities Sales

The U.S. Securities and Exchange Commission recently adopted new regulations designed to increase smaller companies’ access to capital markets. The SEC revised one of its oldest set of rules, known as Regulation A, which exempts certain “small issues of securities” from the normal registration process. SEC Commissioner Luis A. Aguilar formally announced the new rules in a March 25 public statement.

What Is Regulation A?

Typically, a company may not offer securities for sale without first registering with the SEC. The company’s registration statement must include certain basic facts about the business’ operations, including independently audited financial statements. A company may only sell securities without registering if it qualifies for an exemption established by law.

Regulation A is one such exemption. First adopted in 1936, Regulation A initially said any securities offering of less than $100,000 (made over a 12-month period) did not have to be registered with the SEC. The maximum offering amount has increased several times over the years, reaching $5 million in 1992.

The difficulty with Regulation A, at least from the perspective of companies, is that it generally does not exempt securities offerings from state-level regulation. Each state may impose its own registration, disclosure and review process before a security may be sold in that state. This led to a sharp decline in the number of Regulation A filings over the years, to the point where only one such offering was made successfully in 2011, according to the U.S. Government Accountability Office.

Regulation A-Plus

In 2012, Congress directed the SEC to revise Regulation A. The new rules announced on March 25 carry out this mandate. First, the maximum amount a company can raise has been increased from $5 million to $50 million. With this higher threshold, Regulation A filings will also be divided into two levels: “Tier 1” offerings of up to $20 million, and “Tier 2” offerings of up to $50 million. Tier 1 filings will remain subject to state-level regulation, while Tier 2 offerings are now exempt.

However, in exchange for protection from state regulation and review, Tier 2 Regulation A offerings must comply with stricter SEC standards. While still short of the requirements a full-blown securities registration, the new Tier 2 requirements include audited financial statements and limits on what individual investors may risk. Additionally, any first-time Regulation A filer must give state authorities advance notice before selling any securities.

Smaller Does Not Mean Safer

Even with these additional rules, investors should still proceed with caution before purchasing any security exempt from registration. As the SEC’s Aguilar noted, “investments in small enterprises are inherently riskier than investments in larger companies with proven track records.” More than half of all small businesses fail within the first five years of operations.

And just because a company may be small, that does not mean it is entitled to defraud investors. If you have been the victim of false or misleading statements made by any company, including one normally exempt from SEC registration, and you would like to speak with a qualified Florida securities fraud attorney, contact Gregory Tendrich, P.A., today.

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