The SEC’s Advisory Committee on Small and Emerging Companies voted to recommend a new definition for accredited investors to expand those eligible to invest in exempt offerings. During its latest meeting in Washington, D.C., the committee also discussed the status of Regulation A+ which became effective a little over a year ago, and considered the SEC’s proposed definition for smaller reporting companies. In opening remarks, Chair Mary Jo White reported that over 100 offering statements have been submitted to the SEC under Regulation A+, many of which took advantage of the non-public staff review before their public filings. The SEC has qualified 48 of those offering statements.
Expansion of accredited investors. The committee supports the retention of the accredited investor definition in Rule 501, with no changes to the current thresholds other than adjustments for inflation, going forward. The committee recommends expanding the definition of an accredited investor to take into account measures other than financial sophistication, regardless of income or net worth. The pool of accredited investors would also include those that passed certain tests such as the Series 7, CFA, or similar examinations. The SEC should continue to analyze the attributes that best define those with sufficient financial sophistication and the ability to sustain the loss of their investments and do not require the protections of the registration process, the committee concluded.
Regulation A+. Committee Co-chair Sara Hanks reported that the Reg. A+ confidential review process is not overly burdensome and that offerings subjected to the SEC’s review process come out better. One problem is that investors and a lot of small businesses are not aware of Reg. A+. Some companies that have filed under the process find no takers and have to withdraw their offerings, even though they are often less risky than many Regulation D offerings, she said.
Rulemaking petition to expand Reg. A+ eligibility. Sebastian Gomez, head of the Division of Corporation Finance’s Office of Small Business Policy, mentioned that a rulemaking petition has been submitted that would permit all small issuers, including those reporting under Exchange Act Sections 13(a) or 15(d), to use Regulation A, and to permit "at the market offerings" for smaller reporting issuers (Petition No. 4-699, June 7, 2016). Thousands of reporting companies have been excluded from the new Regulation A capital raising opportunity, according to the petition.
The petition was submitted by Dan Zinn, general counsel for OTC Markets Group, who gave a presentation to the committee. Zinn explained that his group organizes 10,000 securities into three markets, one of which includes Reg. A+ companies. Now that the SEC has a year of experience with Reg. A+ offerings, Zinn suggested it was time to consider how to expand the pool of eligible issuers. The SEC has received a dozen comment letters supporting the rulemaking petition and he encouraged others to lend their support.
The committee also heard from entrepreneur Paul Elio, the CEO and chair of Elio Motors, who said capital raising was the most challenging aspect of launching his new two-seat car company. Reg. A+ was one of the means he used to raise capital. The cars, known as Elio, are low cost, fuel efficient, three wheeled motor vehicles, with production due to start in 2017. Elio said that 64 percent of his Regulation A shareholders are people that have reservations for the vehicles.
Definition of smaller reporting company. Finally, the committee considered the SEC’s proposal to amend the definition of a smaller reporting company in its rules and regulations to expand the number of registrants that would qualify (Rel. No. 33-10110, June 27, 2016). Co-chair Stephen Graham said the elimination of the Rule 404(b) attestation requirement for smaller companies would have a greater impact, but Gomez said there was not enough evidence to support that contention. However, the SEC is seeking comment on that issue as well as on the new thresholds under consideration.
Graham noted that emerging growth companies have five years to comply with Rule 404(b), but Gomez pointed out that the EGC exemption was a statutory mandate, not an SEC initiative. There is a cost to not being subject to Rule 404(b), he said, including more restatements, and a benefit to the rule in the lower cost of capital for issuers that have attestations.
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