We’ve been having a lot of “why can’t we do what they are doing?” conversations recently. Potential issuers have asked:
- Why can’t they structure a Reg A real estate offering where the issuer invests in minority holdings in other real estate companies?
- Why can’t they file a 1-Z to exit the Reg A reporting system without bringing their ongoing reporting into compliance?
- Why can’t they file a new Reg A offering without bringing their ongoing reporting into compliance?
- Why can’t they increase the size of their Reg A offering by filing a Supplement to the Offering Circular?
- Why can’t they advertise without including a link to the Offering Circular?
In all these cases our clients have shown us examples of other companies who have done exactly what we are telling our clients they cannot do.
They argue that the SEC letting those offerings proceed means that whatever those other companies are doing must have been sanctioned by the SEC. This isn’t true, and we’ve blogged about this before. The SEC Staff constantly reminds issuers that they are responsible for their own filings: for determining whether the issuer is eligible to use the particular form it’s filing on, for complying with the requirements of that form, and for meeting the ongoing reporting requirements that result from the filing. The SEC Staff can review filings, make comments and in some instances issue stop orders or cease-and-desists. The fact that they haven’t means nothing. The Staff may be so overworked they triage offerings, and decide not to review some. They may make a targeted review, only looking at compliance in a particular area. And in some instances they may, as humans, miss something. All that is irrelevant when it comes to what qualification or effectiveness of a filing means. The process of qualification or effectiveness does not absolve or protect an issuer from compliance with current or ongoing obligations. (Nor does it protect issuers against claims from plaintiff’s lawyers.) That is up to you, the issuer, and your advisors. No-one at the SEC is your mom.
This is something I wanted to flag because we’ve seen a more assertive approach from the Staff recently. In the past, it might happen that the Staff would challenge an issuer’s position with respect to an issue. We would respond, and at some point the Staff might say, either in writing or on the phone, “we don’t necessarily agree with your position but we aren’t going to pursue the issue any more right now.” More recently we’ve seen the Staff say, in effect, “although we aren’t pursuing the issue further now, we want you to acknowledge in writing that you understand that getting qualified under Reg A doesn’t mean we can’t come after you later.”
This doesn't mean anything has changed. It hasn’t. The SEC has always had the ability to do this. But, especially with all the controversy with digital assets, they are just making it very clear that issuers are responsible for determining whether they meet the requirements of securities laws.
However, if you feel the need for a securities mom (or great-great aunt) to say “just because the other kids are doing it doesn’t mean that you should,” feel free to give me a call.