Limited Offering Amount and Mandatory Blue Sky

One of the big problems of Reg A was that only $5 million could be raised. As mentioned, this cap had been increased steadily from its original $100,000 limit in 1936, and some companies might have liked to raise $5 million. Most investment banking firms interested in IPOs, however, did not see sufficient potential commissions in raising such a small amount.

The other big problem, as mentioned: Every deal had to go through full state blue sky review, unless the company was considering a listing on a national exchange. Both the rules themselves, and the limited amount to be raised, made it all but impossible for a Reg A issuer before 2012 to consider a national listing.

As we have discussed, the blue sky review was time‐consuming, expensive, and unpredictable. This significantly enhanced the cost for IPOs in a situation where the amount to be raised was capped at a low level.

Simplified Disclosure and Reporting

One perceived advantage of old Reg A was that issuers had the option of using a simple Q&A format to provide disclosure. In addition, issuers were “non‐reporting” following their IPO. The stock could trade, but they would not become subject to the SEC reporting requirements. This meant lower compliance costs, but also greater difficulty in attracting support for the trading of their stock, obtaining analyst coverage, and the like. It also meant trading was limited to the over‐the‐counter markets.

Old Reg A also did not require audited financial statements to be included in the offering statement. Again, this reduced the cost of the offering, but turned away a number of investors who felt less confident about the reliability of financial information.

Testing the Waters

Old Reg A permitted an issuer to gauge investor interest before filing its offering statement with the SEC. The theory was that this permitted companies to get a sense of whether they are being realistic about their potential for raising money, and of investors' views on valuation and offering terms. This was, and remains, a very attractive feature of Reg A.

As we will see, the final SEC rules under the JOBS Act go further and allow issuers to continue testing the waters after filing their offering statement with the SEC, combined with strict but manageable rules about how the campaigns can be conducted.

U.S. and Canadian Companies Only

Old Reg A could be used only by companies that are incorporated in and whose principal place of business is in the United States or Canada. As we will see and discuss in further detail, the SEC retained that restriction in the new JOBS Act rules. While there has been conjecture about why they did not change this limitation in the new rules, which we will cover, it has never been clear why this restriction was originally included in 1936. It may be that the old Reg A, enacted during the Great Depression, was focused on helping American companies, but then one wonders why Canada also was included.

I have made a semi‐diligent search for any explanation published at the time to explain the reason for this limitation. A special evening reviewing the SEC's annual report for 1936 was particularly squint‐inducing, soporific, and not particularly insightful. Not to offend my very good friends and clients in the Great White North, but it appears the origin of this restriction shall remain a mystery.

Nomenclature

It is helpful to cover a few of the key terms used uniquely in both old and new Reg A. We will add some more that appear in the new SEC rules later, but let us get these out of the way.

• “Offering Statement”—similar to a registration statement in a traditional IPO, this is filed on SEC Form 1‐A and includes Part I with basic information about the offering and the company, Part II, which comprises the Offering Circular, and exhibits. This is the main SEC filing for a Reg A deal.
• “Offering Circular”—similar to a prospectus in a traditional IPO, has disclosure concerning the issuer's business, ownership, and financial condition. Old Reg A permitted either a narrative or Q&A format; new Reg A eliminates Q&A. Each investor must receive or have access to an Offering Circular.
• “Qualification”—similar to “going effective” in a traditional public offering, the official approval by the SEC of the Reg A public offering, allowing the issuer to raise funds.
• “Testing the Waters”—the process of enticing and determining investor interest before (old Reg A) or before and after (new Reg A) filing the Offering Circular.

Let us now explore how the JOBS Act and revisions to “old” Reg A developed.

History of the SEC Small Business Conference

The SEC has been statutorily required to hold an annual conference on small business finance since 1982. Dubbed the Government‐Business Forum on Small Business Capital Formation, it is mandated under the Small Business Investment Incentive Act of 1980.

The GBFSBCF (not the greatest acronym—we can just call it “the Conference”) is typically held each November at the SEC's big auditorium in the basement of their office building in Washington. In November 2017, however, it was held in Austin, Texas, the first time it took place outside the Beltway. It is also webcast live and the webcast is archived and available. In recent years it has become typical for some, if not all, of the SEC Commissioners to attend and give welcoming remarks about how important small business is, how it is the engine of growth, and that encouraging capital formation is key. The Democratic members also typically add that we have to remember that there is also fraud in small business and enforcement remains important.

It is rare that anything the Commissioners say at the Conference becomes news. I believe the webcasting and archiving are what draw them to attend and repeat customary supportive platitudes. They tend to discuss small business achievements at the SEC that almost always were imposed upon them by law. In the November 2017 Conference, for example, new Trump‐appointed SEC Chair Jay Clayton spoke. His remarks focused on helping what he called “Mr. and Ms. 401(k)” obtain opportunities to invest in growth companies. He acknowledged that a “one size fits all regulatory structure does not fit all” as he talked about the benefits of scaled disclosure for smaller issuers. He acknowledged there is room for improvement in the regulations to remove some of the “speed bumps” in the path to capital formation. He also hinted at expanding which companies can benefit from reduced disclosure as “smaller reporting companies.”

The SEC's Office of Small Business Policy historically has run the Conference. Their hardworking staff has been spending quite a bit of time each year planning it. The daylong event typically starts with a panel or two (your author was honored to speak on a panel in November 2016 about Regulation A+). Then there are several breakout groups. The purpose of the breakouts is to develop recommendations to the SEC. Once the recommendations are decided, the participants rank which they consider the most important. Then the SEC publishes the results with the recommendations ranked. The ranking of the 2016 Conference recommendations was released in late March 2017.

Until recently, there was no particular limit on the number of recommendations, but the SEC published only the top 25. In the last few years, however, the SEC has limited each of the three breakout groups to five recommendations each. There were folks coming to the Conference with their one pet issue and pushing it year after year with very little support from others. By imposing a limit, the SEC believes each breakout group will include only suggestions the group as a whole reaches consensus on.

In December 2016, the lame‐duck Congress passed and outgoing President Obama signed into law the SEC Small Business Advocate Act of 2016. The law mandates the creation of a new quasi‐independent position at the SEC called the Advocate for Small Business Capital Formation. The law also created a permanent new SEC advisory committee known as the Small Business Capital Formation Advisory Committee. The Advocate is charged, among other things, with organizing the Conference going forward. As of this writing, the SEC is considering applications to fill the Advocate position under Chairman Clayton.

In February 2016, the U.S. House of Representatives passed the Small Business Capital Formation Enhancement Act, but it had not been approved by the Senate as of fall 2017. The bill focuses on the Conference and provides that, after each set of recommendations is made, the SEC must “promptly issue a public statement . . . assessing the finding or recommendation of the forum; and disclosing the action, if any, the Commission intends to take with respect to the finding or recommendation.” It would be great if this was passed, but it seems unlikely.

The Conference and the recommendations are important because, sometimes, the SEC looks at them and takes action. This happened under SEC Chair Cox in 2007 and 2008. Congress also looks at the list. The various already existing advisory committees the SEC has had focusing on small and emerging companies also looked at the Conference recommendations in fashioning their agenda.

There are, of course, years where the recommendations seem to gather dust on a shelf and be ignored. Truthfully, the SEC over the last 10 to 15 years has done very little on its own initiative to help reduce smaller companies' regulatory burden. The ideas the Conference participants consider important, however, tend to be repeated year after year. This increases the chance they will be noticed at some point.

The breakout participants at the Conference try not to simply create a wish list. They generally seek to develop recommendations that seem doable and do not appear to create concerns for investor protection. Your author was honored to moderate the breakout on smaller reporting companies in November 2016.

The Conference usually ends with a gathering of all the breakout groups to announce their recommendations; then the group and SEC staffers retire to a local restaurant for drinks and banter. The opportunity for practitioners in the field to spend time with the regulators is helpful and important, and those who participate only through the webcast lose this valuable opportunity to hobnob with senior staffers who help fashion the SEC's small business agenda.

The Seminal 2010 Conference

In November 2010, I was present as always at the annual Conference. I have been and still am somewhat well known in reverse mergers, having written two texts on the subject. Much more about this in later chapters since, as mentioned, reverse mergers still are utilized by some private companies seeking a publicly traded stock. In a reverse merger with a “shell company,” the process is efficient and cost‐effective, but has been controversial over the years.

As discussed in the previous chapter, small‐company IPOs dried up around 2000, but there was no shortage of companies seeking to go public. Thus, reverse mergers grew in popularity, and a group of us sought to steer companies to do so legitimately and cleanly. This continued through the 2000s until the industry faced the challenges to Chinese companies brought by short sellers as discussed.

It was pretty clear reverse mergers were headed for trouble, and the “seasoning” rules ensued as described. As noted in the Preface, I had always said that we would not need reverse mergers if smaller company IPOs were easier to do. The reverse mergers were (and are) somewhat awkward, have a bit of a shady history, and are clearly disfavored by the SEC. Reverse mergers often were referred to somewhat derogatorily as “backdoor” listings because you can take your company public through a reverse merger with no regulatory involvement or filings prior to closing.

I came to the 2010 Conference, therefore, armed with an idea. I had heard of a few people trying to use the then‐version of Regulation A for small IPOs. It seemed they struggled with the dollar limit and blue sky review, but were undaunted. I started to think about that and wondered, “What if we can make that better?” I particularly wanted to see the dollar limit go up.

The idea was in my head but not necessarily the exact method of presenting it. So I sort of blurted out, “What if we improve Regulation A, call it, I don't know, Regulation A+, and allow companies to raise more money and become full reporting companies?” The ultimate official recommendation, which the moderator transcribed, was this: “Add an alternative to Regulation A (call it Regulation A+), pursuant to which an issuer can raise more than $5 million (up to a maximum of $30 million) . . . .” It ended up being ranked by participants as #5 out of 25 recommendations at the 2010 Conference.

Who knew Congress would ultimately take it up to $50 million when we only asked for $30 million! My blurted‐out term, Reg A+, thanks to its inclusion in the formal recommendation, went into the regular parlance of practitioners after the recommendation was released and then picked up by Congress. Many from the SEC chair on down refer to the amended Reg A as Reg A+ in speeches and in some formal issued guidance, but it is not an official term used in the actual Reg A+ SEC rules.

So, yes, I coined the term. The current head of the SEC's Office of Small Business Policy, Sebastian Gomez Abero, confirmed this in publicly introducing me at the November 2016 Conference, although he said that I, “possibly along with others,” coined the term (okay, good enough).

My clients who are aware of this have taken to embarrassing me about it. One calls me the “Godfather of Reg A+.” He even greets me that way, “Glad to have you on the call, Godfather.” I was happy because I wanted to get rid of another moniker a client offered, calling me the “Grandfather” of the new rules. (As they say online, lol.)

One last semiserious thing about the term Reg A+. We should agree on how it applies. Some have used the term to apply to all of Reg A as it now stands post‐JOBS Act. Others have used it to apply only to so‐called Tier 2 offerings (more about this later), since Tier 1 deals are basically like the “old” Reg A and only Tier 2 offerings are state blue sky preempted. I think it makes sense to use Reg A+ to refer to Tier 2 deals. That was the “plus” that I was referring to when I first used the term. Tier 1 is just Reg A as it was. Hopefully that approach will be adopted by my fellow practitioners.

Making the Reg A+ Sausage

As the bill was being developed before introduction, I worked with the House Financial Services Committee staff on what ultimately became Title IV, which ordered the SEC to implement amendments to Regulation A. The House version of Title IV was not changed at all when the Senate took up the bill, and it was retained in the final JOBS Act. That is not true of Title III, to the great disappointment of crowdfunding advocates, as we will discuss later.

When I talked with Congressional staff members, I made two things clear. First, the maximum amount that could be raised had to be increased substantially. Second, blue sky state law review of Reg A offerings had to be preempted. Without both of these changes, I argued, Congress should not even bother with Reg A reform. With them, a revolution of successful small‐cap public offerings could ensue.

Reading between the lines, it appeared that Congress was hoping Title IV would help eliminate the controversial reverse merger backdoor listings. They also realized that the duplicative levels of both state and federal review remained a significant barrier to small‐company capital formation. They further seemed to understand the prior IPO underwriting culture that saved initial offering shares for special and favored customers of investment banks, leaving out the average investor. (Well, maybe I am giving Congress too much credit—who knows?)

States Were Not Pleased

I believe Congress also knew this was not going to go over well with the individual states, even with the then‐anticipated large bipartisan support of the JOBS Act. The North American Securities Administrators Association (NASAA, another unfortunate acronym sometimes causing it to be mistaken for the space agency) is a lobbying and advocacy group that represents all the states' securities regulators.

It did take quite an effort for the Congress to pass the JOBS Act, with its state review preemption in Title IV, over their very strenuous objections. NASAA's lobby is usually a pretty powerful one. Congress, however, was hearing from many different quarters that the state review of filings was a significant impediment to capital formation, which leads to job creation.

NASAA argued that it could implement a “coordinated review” process with filings in multiple states. They would appoint a single state regulator to represent a group of states and companies would deal with just one review. They could never ensure, however, that every state would participate, and many of those that tried to be part of the early efforts with this were, shall we say, disappointed.

When the SEC finally wrote their JOBS Act Title IV rules, making clear that Tier 2 deals would not require state review, they acknowledged the states' desire to seek to streamline their review process. The SEC's response in the final full release was, essentially, we appreciate the effort but there is no real proof that it can work. If you come back to us later to show us otherwise, they said, we would be happy to revisit the question.

As we will discuss in Chapter 4, this did not go over well. The state securities regulators already had been beaten down dramatically by NSMIA back in 1996, preempting public offerings on national exchanges. Very popular Reg D Rule 506 deals also are preempted from state review, though states require notice filings and take fees for each filing.

In May 2015, as we will discuss, the States of Massachusetts and Montana brought a lawsuit in response to the new Reg A rules implemented by the SEC and that broadly applied the state preemption in Title IV. In the case, the states tried to argue the SEC exceeded their statutory authority and were acting in an arbitrary and capricious manner in creating the rules, and that the rules should be declared invalid.

Spoiler alert: The case, filed in the D.C. Circuit Court of Appeals, was dismissed, but it took until July 2016 for that to happen. More on this later. Fun fact about losing plaintiff Massachusetts: Back in 1980 when Steve Jobs took Apple Computer public, Massachusetts deemed the IPO “too risky” for their residents and barred the IPO from being offered there. Radio Shack had more sales of personal computers at that point, so Massachusetts was concerned.

As Congress contemplated all these issues, a big bet they made was on how the SEC would actually write the rules to implement the Act. As we will cover later, the SEC was given very broad discretion in Title IV to write the rules mostly as they saw fit. If the SEC did not truly support Reg A+, they could write rules to make it unattractive for companies to utilize. Or, they could do what they did, which we will cover in the next chapter.

Title I: The IPO “On‐Ramp” and Emerging Growth Companies

Title I is indeed significant. It created a new category of issuers called “emerging growth companies” (EGCs). To qualify, you cannot already have completed an SEC registration of shares. Most already public companies therefore were not able to utilize the benefits of being an EGC. An EGC was defined as a company with less than $1 billion in gross revenues (due to inflation this was raised in 2017 to $1,070,000,000). You stay an EGC until the earlier of five years from your IPO or when you hit the limit in revenues, among a few other conditions.

I was rather stunned that Congress went this high. A billion‐dollar company is emerging? I guess in the world of Walmart with $485 billion in revenues that makes sense. Still, most practitioners would have been thrilled if they went up to $250 million. This new definition, therefore, garnered attention from even the biggest players.

There are a number of good things about being an EGC under Title I when conducting an IPO. First, you can disclose only two years of audited financial statements. Companies that are not “smaller reporting companies” (SRCs), typically with a market value up to $75 million, otherwise have to provide three years. Second, as mentioned earlier, you are exempt from the SOX rule that an outside auditor has to attest to the adequacy of your financial controls (SRCs are exempt from this as well).

EGCs, in Title I, also were provided the opportunity to test the waters in a limited way in their IPO with institutional investors. As we know, in Reg A+ that capability is expanded to test the waters with anyone. Previously, however, the “quiet period” rules prevented this in traditional IPOs.

For the first time, Title I permits EGCs to confidentially submit their IPO registration and go through multiple rounds of SEC review before having to come out of “stealth mode,” as it has come to be known. They must come out of stealth at least 15 days before the company's first roadshow. Remember, these are new rules for traditional IPOs; the Reg A+ rules are a little different as we will see.

JOBS Act Title I also allows broker‐dealers to issue research reports about an IPO by an EGC, even if the broker is participating in the underwriting. This was not previously permitted, and is still prohibited with non‐EGCs. In another meaningful development, as alluded to earlier, an investment bank working on an EGC's IPO can have their banker arrange meetings with their analyst, and the analyst now is permitted to attend roadshow meetings. This Chinese wall was deemed important to maintain the analyst's independence, but also was an impediment to marketing deals.

There were a handful of other goodies provided to EGCs, most of which are already available to SRCs, such as an exemption from the “say on pay” rules about compensation. Overall I believe Title I did help and is helping ease the burden on smaller companies' efforts to go public, in particular the confidential filing capability.

The combined features of Title I are known as the IPO “on‐ramp” because they allow companies to work their way up to fuller large‐company disclosure obligations. The concept actually came from an October 2011 U.S. Treasury Department report called “Rebuilding the IPO On‐Ramp.” It suggested using scaled regulation and its recommendations are replicated almost exactly in Title I.

Title II: Advertising in Private Offerings Under Regulation D 506(c)

One of my first reactions in reading the JOBS Act was to tell friends that I thought the big sleeper provision that would ultimately have a big impact would be Title II. As we have discussed, Reg D already is a very popular exemption used to raise money in a private transaction. The problem with Reg D Rule 506, however, was the fact that advertising and general solicitation were prohibited. The rule also required a preexisting substantive relationship between the investor and the company or its investment banking firm, which helped the company develop a reasonable belief that that investor was accredited.

In a world where virtually every single human is connected to the World Wide Web, it seemed anachronistic to continue to prohibit online and other general solicitation in private offerings. Congress also was concerned, however, about protecting less sophisticated investors in publicly marketed private offerings under Reg D.

If advertising is permitted, the challenge would be how to deal with the preexisting relationship issue. The Congress crafted a new rule, Rule 506(c), and codified it in Title II of the JOBS Act. It permits advertising and general solicitation in Rule 506 deals so long as you limit the offering to only accredited investors. Remember, in prior 506 deals, now known as Rule 506(b) deals, you could have up to 35 unaccredited investors if certain information was provided to them. In 506(c), if you want to advertise, it is accrediteds only.

Rule 506(c) requires “reasonable steps” to verify an investor's accredited status. The SEC mostly leaves the method of achieving this to a company. Their rules adopted under Title III provide some guidance, saying that an attorney, accountant, or broker‐dealer can issue a letter confirming accredited status. This is the method almost all those using 506(c) thus far have used, but the SEC has encouraged practitioners to look for other legitimate “principles based” approaches to taking reasonable steps.

Remember, individuals are accredited based on either income or net worth. Income is pretty easy to verify; just show me your tax returns and I can issue a letter based on that. Showing that someone's net worth, not excluding their primary residence, is above $1 million is more tricky. The SEC guidance says it is sufficient to use a brokerage or bank statement on the asset side, and a traditional credit check on the liability side. To button it up, you then get a letter from the investor saying they have no debt other than what is on the credit report. Then you can issue a letter based on that.

With this, you can take out an ad in a newspaper, run radio or TV ads, and take out Facebook and Google ads and the like to promote a private offering. Website portals have been established as a place where multiple deals can be promoted and investors vetted.

Reg D 506(c) has not caught on in any substantial way as of this writing. Most believe that investors simply do not want to go through the hassle of arranging for a third party to verify their status. Services have developed to get a group of investors' letters done, but that has not yet brought a large number of dealmakers to this technique.

As a technical matter, the SEC treats 506(c) offerings as “public offerings.” In this book, however, we are focusing on Reg A+ and other alternatives to a traditional public offering where trading commences as well, which is not the case with 506(c).

Title III: “Statutory” Crowdfunding

There already are and certainly will be more books on JOBS Act Title III, the only part of the law actually called crowdfunding. Many believe Titles II and IV also are forms of crowdfunding. In fact I was pleased to contribute a chapter to Crowdfunding, published in 2014 by my publisher, John Wiley & Sons.

I will not delve into a detailed discussion of Title III other than to say it allows an unlimited number of accredited and non‐accredited investors in a private deal to raise up to $1 million (raised in 2017 to $1,070,000 due to inflation). The House‐approved version had capped the amount at $2 million. The only things the Senate changed in the JOBS Act from the House version were in Title III, including lowering the maximum to $1 million. This was very disappointing for the crowdfunding advocates. Some dubbed the crowdfunding folks “the cool kids” at the Conferences leading up to final adoption of the SEC rules under Title III.

The law and rules under Title III require detailed disclosure and in many cases audited financial statements for these small deals. Services have developed to help early‐stage companies “build their own disclosure” and incur minimal legal fees. As an advocate for startups, for whom Title III primarily was intended, I hope processes will develop that make statutory crowdfunding popular.

Title V: Flexibility to Remain Private

Prior to the JOBS Act, any company with more than 500 shareholders and $10 million in assets was required to become a full SEC reporting company and “go public.” The JOBS Act changed the shareholder numbers to 2,000 shareholders or over 500 unaccredited investors.

Many companies that wanted to stay private or wait to go public until they achieved certain milestones had been frustrated by the prior holder limit. They usually hit the number because of stock issued to employees and insiders as compensation. Title V, therefore, also doesn't count toward the 2,000 number any employees receiving stock as compensation under certain plans. This is part of why we now see more so‐called “unicorns,” private companies with over $1 billion in value, remaining private longer.

Basic Provisions

Here is what Title IV provides. Section 401 amends the Securities Act to give the SEC the authority to exempt from SEC registration under Regulation A public offerings of freely tradeable “unrestricted” securities in an amount up to $50 million in a 12‐month period. The SEC can permit issuers to “solicit interest” (now known as testing the waters under the ultimate SEC rules) before filing an offering statement with the SEC, on such terms as the SEC thinks appropriate.

Section 401 also makes clear that the SEC can require audited financial statements be filed with the Reg A offering statement. As noted, this was optional before the JOBS Act. The section then gives the SEC broad authority to require issuers to prepare and seek approval of an offering statement with various disclosures as it determines. The SEC also was authorized to disqualify “bad actors” from using Reg A, and to require such post‐offering periodic and current reporting about the issuer's operations and financial condition as the SEC determines.

I am particularly fond of Section 401 for another reason. Congress gave the SEC authority, in their discretion, to increase the maximum that can be raised in Reg A offerings to an amount above $50 million. They went even further in the Act as well. The language is worth quoting:

Not later than 2 years after the date of enactment . . . and every 2 years thereafter, the Commission shall review the offering amount limitation . . . and shall increase such amount as the Commission determines appropriate. If the Commission determines not to increase such amount, it shall report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on its reasons for not increasing the amount.

This means the SEC has to look at increasing the maximum every two years and provide reasons to Congress if they do not increase. In 2014, two years after implementation of the JOBS Act, they submitted a report saying they had not yet even implemented rules under Title IV; therefore, it was not logical to consider increasing the amount. SEC staffers have not, as of this writing, clarified what, if any, report was issued in 2016. We do know, of course, that they did not increase the amount in 2016. I believe the staff feels it is just too early to tell if increasing the amount is appropriate.

If a number of larger Reg A+ deals getting close to the $50 million limit are successfully completed, I believe there will be pressure on the SEC to increase the amount. Does this matter? If Reg A+ provides a speedier, cheaper, simpler IPO where the crowd can participate and the SEC is reviewing disclosure, why not expand it to larger amounts? More and more companies might consider going public if larger amounts could be raised.

(As we will see, several companies, particularly in the real estate industry, already have completed $50 million Reg A+ public offerings. The Financial CHOICE Act, passed by the House of Representatives on party lines, would mandate an increase in the Reg A+ limit to $75 million.)

Covered Securities and “Qualified Purchaser”

Section 401 of Title IV also includes a provision making clear that Reg A securities will, under certain circumstances, be deemed covered securities under NSMIA, that key provision meaning the offering is preempted from state blue sky review. The state preemption is triggered only if the securities are offered or sold on a national securities exchange (such as Nasdaq or the New York Stock Exchange), or if they are offered and sold to “qualified purchasers.”

Some Reg A deals, therefore, if not sold on an exchange or to qualified purchasers, would not have the benefit of blue sky preemption, one of the key selling points of new Reg A+. The definition of qualified purchaser, therefore, would seem to be rather important for IPOs planning to trade on the over‐the‐counter markets.

It may have been a good idea for Congress to make clear who should be qualified, but frankly I am not sure they would have had a clear enough understanding of how to make the determination. In the end, therefore, it probably was intelligent that Section 401 says that the definition of qualified purchaser will be “determined by the Commission.”

To be honest, when I first read this language in the final bill I was somewhat disappointed. When one looks at the definition of qualified purchaser used in other contexts in securities regulation, it did not look good. In the Investment Company Act, a qualified purchaser is well above accredited status. In another context, in a proposed SEC rule never finalized, qualified purchaser was to be defined the same as an accredited investor.

Did this mean new Reg A+ deals, to have their blue sky preemption on over‐the‐counter public offerings, would have to be limited to accredited investors or an even higher standard? I was hoping that maybe, given all the disclosure being provided in these deals, the SEC might adopt a light accredited investor standard. I thought they might, for example, say that a qualified purchaser is someone with $100,000 income or $500,000 net worth instead of the $200,000 income and $1 million net worth current accredited standard.

Practitioners were somewhat concerned, but when the JOBS Act was signed, many of us in the trenches were very busy taking in all the other dramatic changes in the bill that are described above. Reg A just was not the focus of initial attention. Second spoiler alert: Because of the various investor protections in the final SEC rules, the definition of qualified purchaser was declared by the SEC in the final rules to be any investor in a Reg A+ (i.e., Tier 2) offering. Keep that in mind as we analyze the Massachusetts/Montana lawsuit in the next chapter.

Study on the Impact of State Blue Sky Laws

Title IV did include one provision with a deadline. Section 402 of Title IV required the U.S. Government Accountability Office (GAO) to conduct a study on the impact of blue sky laws on Reg A offerings. The report was required to be issued within three months after the JOBS Act's implementation. Why do a study after passing the law? It appears to have been intended to help create a guide to the SEC as they fashioned new rules under Title IV.

Right on time, the 30‐page GAO study was released and delivered to applicable Congressional committees in July 2012. The GAO actually went a bit further than the limited mandate of the JOBS Act. The report is entitled “Factors That May Affect Trends in Regulation A Offerings,” and did not limit itself just to the blue sky question.

The report starts by noting that the number of qualified Reg A offerings had dropped from 57 in 1997 to just one in 2011. So clearly there was a problem. As to the reasons, the GAO essentially admitted it could only do so much to determine the causes given the three‐month deadline. They spoke to some securities attorneys (your humble author was not one of them nor have I heard from any of my fellow securities attorneys saying they were contacted), NASAA, and some small business advocates to make their observations.

It did seem there was strong belief that the burden, cost, and delay of state review was a real problem. The report also suggested that Reg D seemed to be a more attractive alternative than a Reg A offering for many. The GAO further noted that it was unclear if increasing the amount that can be raised above $5 million would make a significant difference in the attractiveness of Reg A.

It does not appear that the GAO study did much to change anyone's opinion on the causes of the decline in the use of Reg A, especially given its limited research and short time frame.