Time for Regulation A Reform? Part II

As mentioned in the prior post, Reg A lets you raise up to $5 million with an abbreviated SEC-approved offering circular. You don’t even need audited financials. Then your stock can trade over the counter, but your company is not an SEC reporting company and therefore cannot be listed on the OTC Bulletin Board or any higher exchange.

At the SEC Small Business Conference in November, in our breakout session I made or supported three suggestions to make Reg A more attractive: 1) Increase the maximum offering amount to $30 million at least. 2) Pre-empt state regulation of these offerings. 3) Allow a fast track to full reporting status to speed uplisting. We mentioned the $30 million issue last time.

Now let’s talk about preemption. Presumably this would require an act of Congress, but since the House is already looking at this, presumably that’s potentially doable. One major reason people stayed away from Reg A offerings all these years is that they must be approved by each state in which the offering takes place. Offerings on major exchanges (Nasdaq, NYSE AMEX, etc.) have been exempt from state review since 1996.

Some states have a “merit review” standard that everything subject to their approval gets a thorough look-see. Historically merit review states have caused significant problems and delays in clearing the Reg A offerings.

Reg A will not be more attractive unless state review is eliminated. One could still posit a “notice filing” to let a state know that a Reg A offering is taking place in their state similar to what is done in Reg D 506 offerings. This would also ensure that the state gets their valuable filing fees that they always hate to lose.

Therefore, I hope any Reg A reform will include preemption of state regulation. Next time we hit how to make it easier for these companies to be fully SEC reporting.

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