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.
Background on State Securities Laws
Like the Securities Exchange Commission (“SEC”) at the federal level, states have their own jurisdiction over securities offerings conducted within their boundaries. This can sometimes result in overlapping or additional disclosure requirements and duplicative or merit-based offering reviews by state securities regulators that can potentially add time, cost, and uncertainty to the offering process. For these reasons, in the 1990s, Congress enacted legislation that provided for the preemption (i.e., inapplicability) of state securities laws registration and qualification requirements in certain instances and delegated the SEC the authority to unilaterally do the same in limited circumstances. In 2012, Congress passed the Jumpstart Our Business Startups Act, which directed the SEC to promulgate new rules and added new instances of preemption to the federal securities laws.
Blue Sky Preemption
The SEC’s amendments to Regulation A went into effect on June 19, 2015 and expanded Regulation A into two tiers. One of the biggest advantages to issuers of conducting a Tier 2 offering over a Tier 1 offering is that Tier 2 offerings do not need to be registered or qualified by state securities regulators. This is because the SEC defined securities offered and sold under Tier 2 as “covered securities,” and state securities law registration and qualification requirements do not apply to covered securities.
Preemption notwithstanding, state securities regulators retain the authority to investigate and bring enforcement actions for fraud, collect state fees, and impose state notice filing requirements. Additionally, state securities laws relating to the potential registration of the issuer as a dealer or registration of the issuer’s officers or directors as agents of the issuer within a given state are similarly not preempted.
As discussed in our previous Reg A post, companies planning to issue up to $20 million in securities may elect to proceed under the requirements of either Tier 1 or Tier 2, while those raising up to $50 million in securities must proceed under the requirements of Tier 2. In the digital asset context, both YouNow and Blockstack’s Regulation A token offerings raised over $20 million and were issued under Tier 2. For Regulation A offerings as a whole, according to a recent SEC report, Tier 2 offerings accounted for the majority of Regulation A offerings (70% of filed and 73% of qualified) between June 2015 and December 2019. The report suggests that the Blue Sky Preemption may have contributed to the popularity of Tier 2 offerings among issuers who planned to issue less than $20 million but nonetheless opted to conduct a Tier 2 offering.
Thinking about conducting a Tier 2 offering?
Feel free to reach out to our team: Zachary Fallon, James Blakemore, Julian Russo, and Jenny Leung.