Regulation A+: Opening Up Cross-Border Opportunities

CrowdFundBeat .com # CFB-crowdfunding

Regulation A+:Opening Up Cross-Border

Opportunities

May 5, 2015Canadian Equity CrowdFunding Symposium

by Alixe Cormick and Brian Koscak

Disclaimer• Information purposes only: The materials and information contained in this presentation are

intended to provide information (not advice) about equity crowdfunding and related matters. You should not act on this information presented without first consulting with an attorney.

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Outline of Discussion

• Background to Regulation A+.

• Regulation A+.

• Comparison to a Canadian Offering Memorandum.

• Potential Benefits of Regulation A+.

• Potential Issues When Using Regulation A+.

• Closing Comments.

Canadian Equity CrowdFunding Symposium


Background to Regulation A+

• Original Regulation A.

• Limitations of Regulation A.

• Job’s Act Title IV.



Background to Regulation A+:Original Regulation A

• Adopted in 1933 - $100,000 every 12 months.

• In 1980, cap raised to $5 million, including up to $1.5 million for selling shareholders.

• Offering document Form 1-A allowed two formats.

• Unaudited 2 year financial statements unless audited available (US GAAP or reconciliation).

• SEC and state Blue Sky review.Canadian Equity CrowdFunding Symposium


Background to Regulation A+:Original Regulation A (#2)

• “Testing the waters” permitted before filing; general solicitation permitted after qualification.

• Securities free-trading.

• No cap on investor investment amount.

• Report of sale every 6 months and final report after last sale or use of proceeds.

• No ongoing reporting requirements.



Background to Regulation A+:Limitations of Regulation A

• Rarely used due to:• Cost equivalent to that of a prospectus;

• State Blue Sky review requirements; and

• Availability of lower cost options (Rule 506).



Background to Regulation A+:Job’s Act

• Title IV of the Job’s Act.

• Revitalization of Existing Regulation A.

• Proposed SEC rules issued December 18, 2013.

• Final Rules issued by SEC on March 25, 2013.

• Effective June 19, 2015.



Regulation A+

• Whose Eligible to Use Regulation A+.

• Eligible Securities

• Features of Tier 1 and Tier 2.

• Offering Process.

• Integration of Offerings.



Regulation A+:Whose Eligible to Use Regulation A+

• Must be organized and have principal place of business, in U.S. or Canada.

• Must not be a reporting issuer under the 1934 Act.• Must not be an investment company or blank check company.• Must not be issuing fractional undivided interests in oil and gas

rights, or a similar interest in other mineral rights.• Must not have its securities suspended or revoked under the 1934

Act.• Must not be disqualified under the “bad actor” disqualification rules.• Must have filed all Reg. A+ exempt distribution reports during the

past two years.



Regulation A+:Eligible Securities

• Equity Securities• Common shares.

• Warrants.

• Debt securities.

• Convertible debt securities.

• Excludes asset-backed securities.



Regulation A+:Features of Tier 1 and Tier 2.

Tier 1 Tier 2

12 Month Maximum Offering Amount

$20 million; including up to $6million for selling shareholders

$50 million; including up to $15 million for selling shareholders

Advertising and General Solicitation

"Testing the waters" permitted before filing; general solicitation permitted after qualification

"Testing the waters" permitted before filing; general solicitation permitted after qualification

Number of Investors Unrestricted Unrestricted

Investment Per Investor Unrestricted Restricted by 10% of income or net worth unless accredited investor

Restricted Securities No; Free -trading on issue. No; Free-trading on issue.

Offering Materials Required, must be filed with SEC. Required, must be filed with SEC.

Financial Statements Unaudited 2 year financial statements and interim unless audited available. US GAAP. CDN issuers my use US GAAP or IFRS

Audited 2 year financial statements and unaudited interim . US GAAP. CDN issuers my use IFRS. Regulation S-X. CDN issuers my use US GAAP or IFRS



Regulation A+:Features of Tier 1 and Tier 2.

Tier 1 Tier 2

Pre-emption of State Blue Sky Review

No. Yes.

Disqualification Provisions

Felon & bad actors disqualified per section 926 of Dodd-Frank Act.

Felon & bad actors disqualified per section 926 of Dodd-Frank Act.

Disclosure Liability Yes, full disclosure liability with a knowledge exception

Yes, full disclosure liability with a knowledge exception

Intermediary Required No No

Report of Sales & Use of Proceeds

Exit report filed not later than 30 calendar days after termination or completion of offering

See ongoing SEC reporting requirements.

Ongoing SEC Reporting Requirements

No. Yes; audited financials filed annually; annual, semi-annual, current reporting required

May file exit report, so long as issuer meets certain qualifications



Regulation A+: Offering Process

• Issuer can chose Tier 1 or Tier 2 regardless of amount to be raised.

• Key disclosure document is “offering statement”.• Cross between a Canadian offering memorandum and S-

1 registration statement/prospectus.• Tier 1 – reviewed unaudited financial statements (US

GAAP or IFRS). • Tier 2 - audited financial statements for last two full

fiscal years, audited under PCAOB standards (US GAAP or IFRS).



Regulation A+: Offering Process

• File offering statement on Form 1-A with SEC through EDGAR.• Can be submitted confidentially.

• SEC has opportunity to review offering statement.

• SEC must declare Form 1-A effective.



Regulation A+: Offering Process (#2)

• Tier 1 “offering statement” must be vetted in all states where sales are to be solicited.• NASAA Co-ordinated Review Program (WA state –

Email Documents/Mail Checks).

• Waiver of Policy on Promoters Equity Investment;

• Policies on promotional shares and regarding loans and material affiliated transactions also have some relief.



Regulation A+: Offering Process (#3)



Regulation A+: Integration of Offerings


Offering under Regulation A+ will not be integrated with prior or subsequent offers or sales of securities that are:

• Registered under the 1933 Act, except as provided in Rule 255(e);

• Made in reliance on Rule 701 (stock option plan) or an employee benefit plan;

• Made in reliance on Regulation S; • Made pursuant to Section 4(a)(6) of the Securities Act

(ex. crowdfunded offerings); or • Made more than six months after the completion of the

Regulation A offering.


Comparison to a Canadian Offering Memorandum

• Offering memorandum exemption is available in every province & territory in Canada, but Ontario.

• No limit on how much an issuer may raise or number of investors.

• Available to all issuers regardless of business sector or residency.

• Offering memorandum and financial statements required (Audited unless OM light).

• Regulator approval not required before use.• No intermediary required.



Comparison to a Canadian Offering Memorandum

• AB, SK, MB, QU, PEI, NU, YK or NWT residents if investing $10,000+ must be an eligible investor based on: annual income ($75,000 individually or $125,000 with spouse); or net assets ($400,000); or a close friend, family or business associate; or have obtained advice from an eligible adviser on suitability.

• Advertising and general solicitation allowed.

• Must file notice within 10 days of a sale.

• No ongoing reporting requirements.

• Securities restricted securities.



Potential Benefits of Regulation A+.

• All issuers:• Access to wider range of U.S. investors.• Canadian offering using offering memorandum not

consolidated with concurrent Regulation A+ offering in U.S.

• May elect to become a reporting issuer under 1934 Act on close of Regulation A+ offering and list on close of offering on NASDAQ or NYSE – Market.




• Canadian issuers:• No need to become a U.S. reporting issuer to

access U.S. capital markets.

• Avoid Sarbanes Oxley, Dodd Frank and other onerous U.S. reporting issuer requirements.

• Enables U.S. broker dealers to solicit and sell Canadian securities to a wider audience.




• U.S. issuers:• Access Canadian capital markets concurrently with

Regulation A+ offering using “offering memorandum wrap”.

• Complete Regulation A+ offering in connection with a Canadian going public transaction.

• Avoid Sarbanes Oxley, Dodd Frank and other onerous U.S. reporting issuer requirements.



Potential Issues When Using Regulation A+.

• Private issuers may trigger MI 51-105 - Issuers Quoted in the U.S. Over-the-Counter Markets if investors sell securities on U.S. OTC markets.

• Canadian issuers need an exemption in Canada for any sales under Regulation A+ in U.S. • Ex. BCI 72-503- Distribution of Securities Outside

British Columbia, allows BC issuers listed on a designated exchange to sell outside of Canada without relying on another exemption.




• Tier 2 of Regulation A+ exempts the initial sale of securities and not the selling agent – need a state exemption or must be registered as a selling agent or use a registered broker dealer.

• Regulation A+ securities may not be restricted but Blue Sky rules still apply to secondary trades. Need manual exemption or other exemption required for solicited trades.




• May trigger U.S. reporting requirements, if:• 500 unaccredited shareholders of record; or• 2000 shareholders of record; AND• $10 million in total assets; AND• $75 million in public float (or $50 million in

revenue if no public float).• Existing shareholders are still subject to applicable

hold periods unless included in offering statement.



Closing Comments

• Regulation A+ alternative to Rule 506 accredited investor market in U.S.

• May be used to raise capital, offer debt or as part of a going public transaction in the U.S. or Canada.

• Cost efficiencies if combined with a concurrent Canadian offering using the offering memorandum exemption.

• Most risks can be managed but for MI 51-105 applicable to private issuers.



Thank-you


Alixe CormickVenture Law Corporation

618-688 West Hastings StreetVancouver, BC V6B 1P1

Phone: 604-659-9188Fax: 604-659-9178

Email: [email protected]: www.venturelawcorp.com

Blog: www.AlixeCormick.com Twitter: @AlixeCormickGoogle+: AlixeCormick

Brian KoscakCassels Brock & Blackwell LLP

Suite 2100, Scotia Plaza 40 King Street West

Toronto, ON M5H 3C2Phone: 416 860 2955

Fax: 416 640 3059Email: [email protected]

Website: www.casselsbrock.com Blog: www.BrianKoscak.com

Twitter: @BrianKoscakGoogle+: BrianKoscak

mailto:[email protected]

http://www.venturelawcorp.com/

http://www.alixecormick.com/

mailto:[email protected]

http://www.casselsbrock.com/

http://www.briankoscak.com/

Regulation A+: Opening Up Cross-Border Opportunities

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