On September 16, 2016, the SEC filed its first suspension of the Regulation A exemption against an issuer for failure to file its required annual statement. A suspension of the Regulation A exemption is a Bad Act, disqualifying the company from raising capital under Regulation A, Regulation CF, and Rule 506 of Regulation D. The order notes that under Rule 257 of Regulation A, issuers whose offering statements have been qualified under Tier 2 must file annual reports on Form 1-K for the fiscal year in which the offering statement became qualified and for any fiscal year thereafter. This requirement continues until the issuer meets the requirements to no longer be subject to the ongoing reporting requirements.
The annual report on the Form 1-K is not the only periodic report required under Rule 257. Issuers are also required to file a semi-annual report on the Form 1-SA and current reports on the Form 1-U for significant material events. The annual report is the most time consuming report, as it requires audited financial statements and a more thorough discussion of the issuer’s business and financial results. The semi-annual report does not require audited financial statements, but those financials must be prepared according to generally accepted accounting principles (which means footnotes are required) and management must confirm that all adjustments necessary to make the income statements not misleading have been included.
As the securities issued under Regulation A are freely tradeable, the periodic reports are an important aspect of the amendments to Regulation A that allowed for raises of up to $50 million and preemption of state review. Existing investors, and the potential purchasers to whom they might sell are best off when they have reasonably current information on the issuer. The stop order from September 16 demonstrates the SEC’s interest in ensuring that investors receive this information.
For issuers subject to a stop or suspension order, the consequences are very significant. Under the SEC’s Bad Actor rules (Rule 262 of Regulation A, Rule 506(d) of Regulation D, and Rule 503 of Regulation CF), a stop order or order suspending the Regulation A exemption is a Bad Act that disqualifies the issuer or any underwriter involved in the offering from participating in offering under Regulation A, Rule 506 of Regulation D, or Regulation CF for five years, unless the issuer or underwriter receives a waiver from such disqualification.