Last month, the Securities and Exchange Commission adopted amendments to Regulation A as required by Section 3(b)(2) of the Securities Act of 1933, which was added by Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Section 3(b)(2) requires the SEC to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually. The amended rules establish two tiers for Regulation A offerings: Tier 1 for smaller offerings raising up to $20 million in any 12-month period, and Tier 2 for offerings raising up to $50 million.
The bifurcation of offerings has blue sky implications. The result can be simply stated: Tier 1 offerings under Regulation A remain subject to state qualification requirements, while Tier 2 offerings are no longer subject to state qualification requirements. Explaining how the SEC reached this result is not so easy.
When Congress enacted the National Securities Markets Improvement Act of 1996, P.L. 104-290, it preempted state qualification requirements with respect to "covered securities". Section 18(b)(3) provides that a security is a covered security with respect to the offer or sale of the security to qualified purchasers, as defined by the SEC by rule. In 2001, the SEC proposed to define "qualified purchaser" to implement Section 18(b)(3). However, the SEC never followed through on the proposal.
The JOBS Act also added Section 18(b)(4)(D) to the Securities Act to provide that a security is a covered security with respect to a transaction exempt from registration pursuant to a rule or regulation adopted pursuant to section 3(b)(2) and such security is: (i) offered or sold on a national securities exchange; or (ii) offered or sold to a qualified purchaser, as defined by the Commission pursuant to Section 18(b)(3) with respect to that purchase or sale. In amending Regulation A, the SEC revised Rule 256 to provide that for purposes of Section 18(b)(3) of the Securities Act, a “qualified purchaser” means any person to whom securities are offered or sold pursuant to a Tier 2 offering of Regulation A.
That is how the SEC effected preemption of state qualification requirements with respect to Tier 2 offerings under Regulation A. California, however, has yet to react. Corporations Code Section 25102.1 provides that any offer or sale of a security to a "qualified purchaser" as defined by the SEC pursuant to Section 18(b)(3) is not subject to the qualification requirements of Sections 25110 (issuer transactions), 25120 (recapitalizations and reorganizations), and 25130 (non-issuer transactions) if:
- a notice is filed with the Commissioner prior to an offer in California;
- a consent to service of process under Section 25165 is filed with the notice; and
- the notice filing fee set forth in Section 25608.1 is paid.
However, the Commissioner has yet to adopt a form of notice. Release 112-C (June 8, 2000) includes the following note:
Section 25102.1(a) ["Qualified Purchasers"]: $600 (Corporations Code Section 25608.1(c).)
[NOTE: At this time, the exemption is inoperative. The Securities and Exchange Commission, pursuant to Section 18(b)(3) of the Securities Act of 1933, has not defined who may be a "qualified purchaser"; as a consequence, there is no form to be filed under this section and no fee to be collected.]
It remains to be seen if and when the Commissioner of Business Oversight adopts a form of notice for Tier 2 offerings under Regulation A.
[Update: Commissioner imposes Tier 2 notice filing requirement. See this post.]