By John M. Jascob, J.D., LL.M.
OTC Markets has filed a rulemaking petition asking the Commission to expand the scope of recently-amended Regulation A to allow offerings by SEC reporting companies. The petition argues that the SEC’s decision to exclude otherwise qualified companies that meet the high disclosure requirements of full SEC reporting is counterintuitive and inconsistent with the JOBS Act mandate to expand avenues of capital formation for all small companies.
Transparency and technology. The petition notes that online capital raising under Regulation A+ has the potential to change and modernize the capital markets by harnessing the connectivity and information distribution power of the Internet. In its March 2015 adopting release, the Commission embraced transparency and technology with respect to offerings conducted under Regulation A+ by requiring offering materials to be made publicly available. According to the petition, this represents a momentous philosophical change by the Commission, which now recognizes the danger of small company offerings being sold through private, phone-based sales, hidden from public and regulatory scrutiny.
According to OTC Markets, the next logical step in this evolution is to expand the scope of Regulation A+ to include SEC reporting issuers already providing in-depth periodic disclosures to the public. The petition observes that the JOBS Act itself does not limit the types of companies that may be afforded access to the streamlined qualification process under amended Regulation A. Although the SEC stated that it would prefer to wait until the Regulation A+ market developed before expanding the scope of authorized issuers, limiting the rule’s scope solely because it excluded reporting companies in its prior, seldom used form does not give effect to the congressional intent behind the JOBS Act, the petition argues.
“Lost opportunity.” In the view of OTC Markets, the SEC’s determination with respect to Exchange Act reporting companies is a lost opportunity to create more efficient paths for capital formation for all small issuers. Allowing smaller, fully SEC reporting companies to raise capital publicly via Regulation A+ offerings would engage a wider circle of investors and ultimately enhance liquidity in the secondary market, the petition states. Among other things, opening up Regulation A+ to smaller reporting issuers would allow smaller investors a greater opportunity to participate in what otherwise might be private offerings, limited to a small club of savvy professional investors.
In addition, other capital raising options for smaller reporting issuers lack the protections and advantages that investors receive in Regulation A+ offerings. For example, Regulation D securities are not freely tradable, which may result in a lower price per share and the potential for increased shareholder dilution. Moreover, private placements by publicly reporting companies through “PIPES” offerings have been associated in some instances with unsavory market participants and practices, including structures that harm public investors with aggressive share discounting and dilution.