Regulation A+ and Testing the Waters

One of the most useful provisions of the Regulation A+ Rules issued by the SEC on May 25 is new Rule 255, “Solicitations of interest and other communications.” This provision allows companies to “test the waters” and determine if there is any interest in its investment offering before it has filed anything with the SEC, prepared any offering materials, hired counsel, engaged an accountant, or even formed the company that will offer securities.  However, there is a catch.  Once a company has relied on the testing the waters provision under Rule 255 without having filed anything with the SEC or state regulators, it may only rely on Tier 2 of the new Regulation A+ rules.

This odd situation was identified by SEC Commissioner Daniel Gallagher at Vanderbilt Law School.  The new rules only preempt state securities registration rules when “securities are offered or sold pursuant to a Tier 2 offering.”  Offers not made under Tier 2 must comply with all state law filing requirements.  Rule 255, allowing for testing the waters communications, specifically identifies all testing the waters communications as offers of securities.

State securities laws are varied on when and what filings must be made before any testing the waters communication is available for Regulation A offering.  For example, in Virginia, issuers are required to file a Solicitation of Interest form 10 days prior to any testing the waters communication being made.  Arizona requires a similar form filed in advance of any communications, and also requires a filing fee.  Other states, like California, do not allow for any testing the waters until after a Regulation A offering statement has been filed with the SEC.  The last comprehensive study on which states allow for testing the waters communications in Regulation A offerings was completed in 1997.  At that time, only 17 states allowed for some type of testing the waters communication.

This creates a predicament for companies looking to use Regulation A+.  One of the great benefits of testing the waters is to determine where investors are most likely going to come from.  If they were isolated to a few states, then proceeding with a Tier 1 offering in those specific states would be reasonable.  However, doing any pre-filing testing the waters will force companies into Tier 2 offerings.  Conceivably, an issuer that had previously engaged in Rule 255 pre-filing testing the waters could allow for sufficient time to pass, and then start fresh with a Tier 1 offering that does not utilize any testing the waters communication until after the appropriate filings have been made with state regulators.  Still, this requires an analysis of whether the new offering will be integrated with the prior effort.

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