We are often asked by companies, “why can’t I do [fill in the blank]? I see this other company doing it.” Our response has always been that just because those other companies have not yet been subject to enforcement, doesn’t mean that there will not be an issue later on. The time and effort to build a case, and often reaching a settlement, means that public knowledge of enforcement lags.
The SEC has recently made this clear in regards to non-compliant offers and sales under Reg A. On May 16, 2023, the SEC announced 10 settlements with issuers that violated the rules of Reg A. See, https://www.sec.gov/news/press-release/2023-94. The common theme of the violations centered around three areas:
- Using a post-qualification supplement to increase the number of shares being offered;
- Using post-qualification supplements to change the price outside of the allowed 20% range, or create tiered pricing structures (at the market pricing); and
- Failing to file an annual updating amendment to ongoing offerings of greater than one year.
These violations could have been avoided by listening to the advice of counsel with experience in Reg A.
For other companies considering a Reg A offering, or that currently have an ongoing offering, be aware that regulators are paying attention and this may just be the beginning.
Playing fast and loose with the Reg A rules can result in civil fines and regulatory enforcement that may hamper a company’s ability to raise capital in the future.