Section 401 of the Jumpstart Our Business Startups Act (the “JOBS Act”) added Section 3(b)(2) to the Securities Act. This directs the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act.
Last week, the SEC provided proposed rules to implement this portion of the JOBS Act. The SEC summarized:
“We propose to implement this JOBS Act mandate by expanding Regulation A into two tiers: Tier 1, for offerings of up to $5 million; and Tier 2, for offerings of up to $50 million. … Issuers in Tier 2 offerings would be required to include audited financial statements in their offering documents and to file annual, semiannual and current reports with the Commission, and purchasers in Tier 2 offerings would be subject to certain limitations on their investment.”
In a 387-page proposed rule, with requests for specific comments thereon, the SEC gave details of what would be needed for the Tire 1 offering, and the more attractive (larger) Tier 2. Generally, to qualify for Tier 2, a company would need to:
1. Provide audited financial statements.
2. File annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting
3. Limit its investors so that they are not purchasing more than 10 percent of the greater of the investor’s annual income or net worth.
State Blue Sky laws would be preempted by federal Tier 2 Offering requirements.
In this article, I provided my initial investor caution regarding JOBS Act filings. While these comments on the purpose of the capital markets remain correct, the SEC’s current proposed restrictions on Tier 2 files are sensible, and provide investors needed information. I continue to believe that Tier 1 filings should be avoided by any investor who actually cares about making money.