Reg A+ “Testing the Waters” Part II
As I stated in my posting of August 18, 2015, the states of New York and Washington assert the authority to mandate certain filings and fees of prospective issuers intending to “test the waters” under Tier 2 of Regulation A. The following is part of a comment that I recently filed with the State of Washington explaining why the state’s proposed rule (WAC 460-18A-200) regarding Regulation A offerings is unenforceable as to “testing the waters”. (This is strictly my opinion, and I do not advocate anyone ignoring any state law, rule or regulation regarding the testing of interest under Tier 2 of Regulation A.)
No State Filing Permitted Until SEC Filing
Securities offered and sold under Tier 2 of Regulation A are “covered securities” by reason of the United States Securities and Exchange Commission (Commission) classifying them pursuant to 17 CFR 230.256 as “qualified” securities. Pursuant to 15 U.S.C. 77r, the states may not require the registration or qualification of any covered security.
However, pursuant to 15 U.S.C. 77r(c)(2)(A), a state may require issuers of covered securities to file with the state “any document filed with the Commission…together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the State (if such sales data is not included in documents filed with the Commission), solely for notice purposes and the assessment of any fee, together with a consent to service of process and any required fee.”
As authorized by Title IV of the JOBS Act, 17 CFR 230.255 permits entities to determine interest in a contemplated offering under Regulation A, a/k/a “testing the waters”. Neither Rule 255 nor any other rule of Regulation A requires a first time prospective issuer to file with the Commission any offering statement, notice, or any other document prior to testing such interest. As such, if a prospective issuer proceeds to solicit interest under Tier 2 prior to filing an offering statement, or any other required document, with the Commission, then there is no filing that a state can require under 15 U.S.C. 77r(c)(2)(A).
As the Commission states on page 147 of the supplementary information provided with the final rules amending Regulation A, an issuer must publicly file its offering statement with the Commission at least 21 days prior to qualification by the Commission. This 21 day rule, the Commission reasons, provides prospective investors that received a solicitation of interest pursuant to Rule 255 with the most current information about the offer for at least 21 days prior to purchasing the securities. The Commission further states: “in light of the preemption of state securities laws registration requirements in the final rules for Tier 2 offerings, the 21 calendar day requirement will enable state securities regulators to require such issuers to file such materials with them for a minimum of 21 calendar days before any potential sales to investors in their respective states.” The Commission by this statement seems to agree that the states may only mandate filings made with the Commission.
Accordingly, while the State of Washington possesses the authority to mandate the filings described by 15 U.S.C. 77r(c)(2)(A), it does not possess the authority to mandate such filings by entities seeking to solicit interest under Rule 255, until such entity has first filed such documents with the Commission.
Public Exchange Tier 2 Offerings May by Entirely Exempt
Additionally, while securities issued under Tier 2 of Regulation A are covered securities by reason of the Commission Rule 256 defining them as “qualified securities”, securities sold under Tier 2 that will be sold on the OTC, or similar exchange, could also be covered securities by reason of being listed on such exchange “upon completion of the transaction”. (See 15 U.S.C. 77r(c)(2)(D).) If such Tier 2 offerings are exchange traded securities as defined by subsection 15 U.S.C. 77r(b)(1), then the states would possess no authority to mandate any filing whatsoever by any such issuer pursuant to the Proposed Rule.
Conclusion
Based on the forgoing, the State of Washington lacks any authority for the enforcement of the Proposed Rule prior to any document being filed with the Commission. The State of Washington is an important state for entities seeking to raise private capital. By considering the issues raised in this comment, the state can avoid confusion by those seeking to raise funds under Tier 2 of Regulation A and avoid the likelihood of litigation regarding the enforceability of the Proposed Rule.
Author’s Note
As stated at the outset, the forgoing is a general opinion, and no one contemplating the solicitation of interest under Tier 2 should ignore any state law, rule or regulation related to such activity. Instead, such persons should seek the advice of an attorney experienced with securities laws prior to proceeding to test the waters in any state.
The information contained in this article is for informational purposes only and is not intended as legal advice or as investment advice. Your circumstances are unique, and you should therefore consult with legal counsel prior to acting on any of the concepts or subjects discussed in this article.
Michael Sewell, MBA and JD, has practiced law in Missouri since 2005, and he is the owner of St. Louis based Sewell Law, LC, which provides legal services in the areas of business formation, private securities, and litigation.
Feel free to contact Michael at michael@SewellLaw.net.
Michael Sewell is also the organizer of www.meetup.com/equity-crowdfunding-STL and www.meetup.com/equity-crowdfunding-KC.
This article was published on September 12, 2015.
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