Did you know that Reg A Offerings are “qualified” instead of being declared effective?
This post is part of an ongoing series exploring the basics and not-so-basics of Regulation A. You can find other posts in the series here. Contributions to this article made by Zachary Fallon, James Blakemore, Julian Russo, and Jenny Leung.
Regulation A (“Reg A”) is an exemption from registration under the Securities Act of 1933 (the “Securities Act”) that allows companies to publicly offer and sell up to $50 million in securities annually to retail investors. But while Reg A offerings are exempt from registration, issuers who wish to take advantage of the exemption must qualify a substantive offering document (an offering statement on a Form 1-A) with the U.S. Securities and Exchange Commission (the “SEC”).
Before the SEC’s amendments to Reg A in 2015, an offering statement that was filed with the SEC could technically be qualified (i.e., permitted to proceed) automatically with the passage of time—20 calendar days after filing, to be exact. The process was analogous to the process for registration statements in registered offerings under Section 8(a) of the Securities Act.
Issuers, however, rarely allowed their offering statements to be automatically qualified out of legitimate concerns that their offering materials, as filed, might be materially deficient, and potentially lead to lawsuits. To avoid this and to facilitate the SEC staff review and comment process, the issuer would include a delaying notation on the cover of its Form 1-A stating that the offering statement would only be qualified by SEC order. Once the issuer and SEC staff reviewing the filing came to general agreement on the substance of the disclosure in a given offering statement, the issuer would file an amendment without the delaying notation indicating that the offering statement would become qualified on the 20th calendar day after filing. SEC staff could accelerate the date of qualification, but otherwise, after the passage of 20 calendar days, no further action was required in order to begin to offer and sell securities.
The 2015 amendments to Reg A altered the qualification process so that an offering statement could only be qualified by order of the SEC, and the process associated with the delaying notation and automatic qualification was eliminated.
“Notice of Qualification”
Qualification not approval
A company may begin to accept payment for the sale of the securities described in the offering statement only after its offering statement has been qualified. It bears emphasizing, however, that by issuing a notice of qualification the staff neither endorses an offering nor suggests that it is worthy of investment. As with all securities offerings, whether registered or exempt, the SEC does not evaluate the quality (or merits) of the securities being offered and sold. Nor does the SEC assess or approve the accuracy of the offering statement. Instead, the staff limits its efforts in reviewing offering statements to comments that help ensure compliance with the rules and disclosure requirements. The resulting improved disclosure ultimately inures to the benefit of all parties involved in the offering. Investors benefit from the ability to make more informed investment decisions, while companies gain greater protections from potential lawsuits alleging, for example, that material information was omitted from the offering materials.
Feel free to reach out to our team: Zachary Fallon, James Blakemore, Julian Russo, and Jenny Leung.