It took a little more than a year and a half. Commentators had spent some time wondering what rules would be proposed by the SEC under Title IV, though frankly the blogosphere was much more active speculating about Title III crowdfunding and digesting the new IPO on‐ramp. Would Reg A+ really have legs? Would the SEC instead propose a draconian set of rules that would be unattractive to issuers?

Thankfully, for most dealmakers the wait was worth it. On December 18, 2013, the SEC offered up a holiday present to the small‐ and microcap world in the form of its proposal to implement Title IV of the JOBS Act. As with all new rule proposals, it had to be presented to the public and open to comment before the SEC could implement final rules.

Lovingly known as Release No. 33‐9497, not too many were planning to make the proposed rules their Christmas reading material. That is because the proposing release was a mere 384 pages! The brainchild of many on the SEC staff, my understanding is that the super‐talented Karen Weidemann was the primary driver of the innovative and disruptive approach to small‐cap regulation represented by this audacious proposal. Karen, an attorney who was with the SEC Office of Small Business Policy, moved on to a position with the Public Company Accounting Oversight Board and did not have the chance to help oversee the final birth of her proposal when the permanent rules were approved in March 2015.

We did all read it, eventually. The reaction of most: To paraphrase the Good Book, it was good. In fact my own initial reaction was, “Wow.” Then when I read the proposal again I realized there were some thoughts for improving it that, in some cases, did make it into the final rules (more about that later). Most importantly, however, it was immediately clear that the SEC wanted to set up its Regulation A+ rules to be attractive to companies without sacrificing investor protection. I think it is important to understand the process by which the proposal developed into the final rules, so let us first review the proposal, then the final rules, and cover what was improved between them.

SEC's Reg A+ Rule Proposal

The main topics covered in the proposed and final rules are eligibility, the offering statement, ongoing reporting, and testing the waters. We also will cover a few other topics addressed, including “bad actor” disqualification. I always laugh when I print these long SEC releases because the printout includes the many pages of the release devoted to how the release complies with the Paperwork Reduction Act. Let us review the main topics and a few spoiler alerts.

Comment Process

The SEC accepted comments to the proposal officially through March 24, 2014. Your author was quite involved in the comment process. I was active on the American Bar Association committee developing their formal comments. I also submitted my own lengthy comment letter from my then–law firm in January 2014. I am pleased to say the SEC listened: My comment letter was cited 30 times in the final SEC release, though a few times it was to say they disagreed with what I was suggesting.

Anyone can go on the SEC website (www.sec.gov) and submit comments to proposed rules. The SEC staff truly appreciates input from practitioners and companies affected by their proposals. It is not unusual for some proposed rules to receive zero comments. The SEC, however, received around 100 comment letters to the Reg A proposal. Comments came from Congresspeople, Senators, trade associations, NASAA, and a number of individual states, public companies, attorneys, crowdfunding advocates, major accounting firms, think tanks, you name it. The point is that many important people were very interested in this new set of rules.

Comments formed a wide range. There was, however, a heavy focus on issues relating to becoming full reporting, the 10 percent income or net‐worth limitation, and the small $5 million limit on Tier 1 offerings. Now let us review how it all turned out in the end.

Final Reg A+ Rules

The SEC released the long‐awaited final rules in March 2015, and they became effective June 19, 2015. It took a full year from the end of the comment period to finish and update the rules. As a practical matter, the SEC informally acknowledges that it continues to review comments that are submitted after the comment period ends. Roughly 30 comments were received after the deadline in March 2014. This provided additional input and may have been part of the reason it took a year to complete the final rules.

The final rules, as noted in the spoilers above, responded to a number of issues raised in the comments. As a result, Reg A+ became even more attractive than as proposed. There remain, as we will cover in Chapter 7, a number of further improvements that have been suggested, including a formal petition filed by OTC Markets (which my current law firm formally supported) with respect to some of these issues.

That said, the final rules created an exciting, attractive, and workable option for smaller companies seeking to go public. Here are the important changes made in the final rules:

• Increase in Tier 1 Offering Size. As noted, the SEC decided to increase the amount that can be raised in a Reg A Tier 1 deal to $20 million. If a company is willing to go through full state blue sky review, they can take advantage of the option to have no reporting obligations after their transaction and to avoid preparing audited financial statements.

  There was a feeling among some who work on smaller deals that leaving Tier 1 at the same level as old Reg A would not really effect the type of reform they believe Congress was seeking in Title IV of the JOBS Act. As noted earlier, the SEC also increased the amount that can be included from selling security‐holders in the Reg A Tier 1 offering to $6 million. In Tier 2, you can include up to $15 million from selling security‐holders. In both cases those amounts go toward the total cap in the applicable tier.

• Path to Full Reporting. Exchange‐listed Reg A+ IPOs became possible because of a change in the final rules allowing a path to full SEC reporting status. The final rules permit a simple Form 8‐A to be filed upon completion of the Reg A+ IPO. The SEC was comfortable doing this because they added a requirement that an issuer has to make Form S‐1 (Part I) level disclosure in its offering statement to qualify to use Form 8‐A. A real estate investment trust (REIT) can do the same using SEC Form S‐11 level disclosure.

  Another unique requirement: The Form 8‐A has to be filed within four days after SEC qualification of the offering. As previously noted, in traditional Form S‐1 IPOs, a Form 8‐A can be filed up to a year later. Since Form 8‐A incorporates information by reference from the Offering Statement, the SEC felt that it was important that the 8‐A be filed at the same time as the qualification of the Offering Statement so that the information being incorporated is current. The rules do permit a company to become qualified, get ready for a closing, and then file a post‐qualification amendment, which then leads the SEC to “requalify” the offering, and file an 8‐A at that time.

  Interestingly, in the Paperwork Reduction Act section of the final rules, the SEC predicted that only 2 percent of Reg A issuers will use Form 8‐A. If there are 100 Reg A deals per year, let's say, they are suggesting only two will seek a national exchange listing or otherwise want to be full reporting. As we will discuss further, the current trend, thanks to these changes in the final rules, appears to be proving the SEC wrong.

  As a result, active practitioners now advise issuers and Wall Street that there is now no reason not to use Reg A+ for any IPO under $50 million. You can go right to a national exchange with much quicker and easier SEC review and full testing‐the‐waters capability. Why ever use S‐1 for smaller IPOs?

• No Limit on Accredited Investors. In response to comments, the SEC retained the limit on non‐accredited investors to invest no more than 10 percent of the greater of their income or net worth, but made a change from the proposal to exclude accredited investors from that limit. Commenters (such as your author) argued that accredited investors may choose to invest in Reg D deals with no disclosure being provided. In a Reg A+ IPO, these more sophisticated investors must receive comprehensive disclosure and audited financial statements that are reviewed by the SEC before delivery to investors.

  The SEC acknowledged in the release on the final rules that accredited investors are “capable of protecting themselves” in exempt offerings such as Reg A+ and therefore removed the limit. In the case of individual non‐accredited investors subject to the limit, the calculation of income or net worth is made in the same manner as a determination of accredited status for purposes of Reg D. The main thing to remember in this definition is to exclude the value and mortgage on your primary residence to determine net worth.

  Importantly, the SEC also made clear that there would be no 10 percent investment limit for any investor if the Reg A+ offering will lead to an immediate listing on a national exchange. They felt the listing standards of the exchanges and greater likely liquidity were sufficient protections. Thus, in Reg A+ deals headed to an exchange, any investor can invest any amount.

  The other worry that practitioners had was how the investors with limits would certify their compliance with the limit. This fear was allayed as the final rules permit the investors to “self‐certify” both as to their accredited status and as to their not exceeding the limit if they are not accredited.

  There was another issue with the proposal and this limit. The SEC had proposed the 10 percent limit using standards that apply only to individual investors. How do you determine 10 percent of income or net worth of an entity that invests? Some, for example, may have no income, but might have substantial revenue. And what definition of income would apply? Net income? Earnings before interest and taxes? This was not clear.

  This issue was resolved in the final rules. A non‐accredited investor that is not an individual cannot exceed 10 percent of the greater of the investor's revenue or net assets (as of the purchaser's most recent fiscal year end). This seems like a good deal of red tape, but these new confirmations have been built into subscription agreement forms that issuers have been using. It is not a big deal to ask an investor to confirm her compliance with the limit if it applies in an over‐the‐counter public offering. As we will see, this limit is a major reason the state lawsuit seeking to invalidate the rules was unsuccessful.

• Rule 15c2‐11 Information. An apparent oversight in the proposal related to permitting broker‐dealers to make markets in post‐Reg A offering stocks. In general, these “market makers” cannot make trades in stocks unless they review certain information about the issuer. The light reporting obligations might not have been deemed sufficient. Thankfully, the SEC addressed this in the final rules after comments were received. The SEC made clear that an “issuer's ongoing reports filed under Tier 2 will satisfy the specified information about an issuer and its security that a broker‐dealer must review before publishing a quotation for a security (or submitting a quotation for publication) in a quotation medium.”

  One related issue was among the relatively few disappointments in the final rules. Shares of stock become publicly tradeable if they are registered with the SEC or some exemption from registration applies. Reg A is one of those exemptions and there are others. One of these is SEC Rule 144. If stock is issued in a private offering, Rule 144 allows public resale in most cases starting six months following issuance. However, one requirement of the availability of this exemption in many cases is that there is “adequate current public information” about the company available.

  If a company chooses to become a full SEC reporting company, such as if it will trade on a national exchange, this is not an issue and Rule 144 is fully available. But if a company completes a Reg A+ IPO and trades over‐the‐counter, is satisfying the light reporting obligations sufficient for adequate current public information? This question was raised in a number of comments to the proposal.

  Unfortunately, the SEC answered in the negative in the final rules. They argued that quarterly reporting is an essential element to the availability of Rule 144. They did offer helpful suggestions, however. First, they indicated that a company would have Rule 144 available during the six months of the year that their information would be current. They further suggested that a company could choose voluntarily to submit quarterly reports on Form 1‐SA for the first and third quarters, and if they did so, the company would have full availability of Rule 144.

  This is important because companies completing Reg A+ offerings and using light reporting may wish to continue to raise money. They may want to do so using a Reg D private placement. Investors in those offerings wish to understand when and how their stock would become tradeable under Rule 144. If that rule would not be available, those investors might either not invest, or choose to demand that the company spend quite a bit of money to register the shares to be publicly resold, or file a further Reg A “resale” offering statement.

  As a practical matter, however, this is unlikely to be a major issue for several reasons. First, any company trading on a national exchange will be a full reporting company and Rule 144 will be available. In addition, a company entering light reporting on either OTCQX or OTCQB will be required, by the rules of those trading platforms, to file Forms 1‐SA for the missing quarters. Rule 144, therefore, will be available for those companies as well. The only affected companies, therefore, will be those in light reporting and choosing to trade on OTC Pink.

States' Failed Lawsuit Against the SEC

Just when we thought it would be safe to finally move ahead with Reg A+ deals, a problem arose. On May 22, 2015, less than a month before the effectiveness of the new rules, two states, Massachusetts and Montana, each filed separate lawsuits against the SEC, seeking to invalidate the new rules. The cases, brought in the Circuit Court of Appeals in Washington, D.C., were consolidated a week later into one case.

The states' arguments were, essentially, that the SEC went further than Congress intended or permitted them when they said every investor in a Tier 2 offering is a qualified purchaser. They also said the rules were “arbitrary and capricious.” This is the primary standard used to attack alleged excesses of administrative agencies. They also tried to argue that the SEC somehow was not actually given the right to preempt state blue sky review of Reg A offerings by the JOBS Act.

The uncertainty of this lawsuit was a significant issue in the newly approved Reg A+ world. Should companies proceed with transactions? What if the rules are invalidated in the middle of a deal? What would happen then? What if a Reg A+ deal is approved and closed and stock is trading and the rules are later invalidated? Would the transaction be rescinded or voided? These were fair and legitimate questions being asked by actual and potential clients.

My advice to clients at the time was to move forward cautiously. If the rules are invalidated mid‐transaction, we can refile as a traditional Form S‐1 IPO. I also did not believe any resolution of the case would invalidate deals completed while the case was pending. Upon filing the case, the states had sought an immediate temporary order stopping the implementation of the rules during the case, but the court denied it. It seemed, therefore, unlikely that completed deals would be affected if an invalidation order was issued. I did, of course, have to advise clients that anything was possible.

We were hopeful that the case could be resolved quickly given the urgency of the situation and the fact that it was being commenced at the appellate level. Sure enough, NASAA filed a “friend of the court” brief supporting the whole thing. Did they arrange these individual filings and coordinate with the states? That is not clear.

In November 2015 the SEC finally responded to the merits of the claims in a court filing. They said that they have meaningfully increased both disclosure and reporting obligations of Reg A issuers, and imposed an investment limit on non‐accredited investors in blue sky exempt Tier 2 offerings. They further reminded the court that the costly and burdensome state reviews were one of the main reasons no one used Reg A before 2012.

In July 2016, the Court dismissed the entire case. The 23‐page, very well‐written, clear and concise opinion started with a brief history of securities law, how it started with the states but moved to add federal oversight after the 1929 market crash. Offerings exempt from full SEC registration for smaller companies have been around for a long time, and Reg A actually was first adopted in 1936. In 1996, as we discussed earlier, with NSMIA Congress preempted state oversight of offerings involving “covered securities,” at first essentially those to trade on national exchanges such as Nasdaq or the NYSE. The JOBS Act in 2012 expanded covered securities to include those issued in Reg A+ offerings to “qualified purchasers,” a term the Act said was to be defined by the SEC. The SEC said everyone is qualified because of additional investor protections in the new rules.

To succeed in their challenge, the states would have had to prove (1) that the JOBS Act “unambiguously foreclosed” the opportunity for the SEC to write the rules the way they did or (2) that the rules were “arbitrary and capricious” and serving no valid economic purpose. As mentioned, the states actually tried to argue that the JOBS Act was not clear in preempting state review of Reg A+ offerings.

The Court clearly and strongly disagreed and made clear it was Congress, not the SEC, preempting the states. They also stated firmly that the SEC was given very broad power in the JOBS Act to write the definition of qualified purchaser almost entirely as they wished, regardless of prior proposals on other matters and even regardless of the plain meaning of the words. And it also noted that they added further protections such as the limit on investments by non‐accredited investors and the enhanced disclosure and reporting obligations, as well as clearly demonstrating the economic benefits of the new rules. So, said the Court, they were not foreclosed by the law to act as they did and they did not act in an arbitrary or capricious fashion.

And so . .

As a practical matter, the Reg A+ revolution really did not begin until this court ruling in July 2016. That said, a number of Reg A+ deals did close while the case was pending. Many players, however, in being briefed on the new rules as well as the lawsuit, chose to wait until it was clear that the legal challenge was over. Beginning in June 2017, the first Reg A+ deals to trade on national exchanges, starting with my client Myomo Inc., were completed.

We now had a very attractive new set of rules, a multitude of choices as to how best to utilize Reg A depending on a company's situation, and yes, some experience for practitioners to gain as they work their way through the new regime. Securities professionals, however, are used to change. The regulatory environment is an ever‐evolving mosaic of laws, rules, interpretations, and so‐called “no‐action” letters. Anyone experienced in the field knows that it is essential to keep up on new developments.

Reg A+ remains relatively new. For a company seeking a national exchange listing and a full SEC reporting status, however, there is not that much that is different from a traditional IPO, and only improvements on the cost, timing, and hassle. For a company seeking an over‐the‐counter listing and either a Tier 1 no‐reporting option or a Tier 2 light reporting option, some new learning is required. Upon completing that education, however, smaller companies have a significantly attractive new arrow in the quiver of financing options. Let us hope this tome provides a useful introduction to that education, starting with the next chapter outlining the preparation of an offering statement and conducting a testing‐the‐waters campaign.