Here at CrowdCheck, we have been worried about how state regulators would respond to the SEC's new testing the waters rules for Tier 2 Offerings under Regulation A. As we previously addressed on this blog, the new rules exempted testing the waters communications from federal securities registration requirements, but left some ambiguity with respect to the application of "state notice" filings (which are permitted even in Tier 2 offerings). After all, testing the waters communications are offers of securities. And when those communications are made through open, online forums —such as through an investment platform or social media — those are offers of securities in every state and territory.
Washington State has recently adopted rules that will allow companies to engage in testing the waters under Tier 2 of Regulation A without the need to make a notice filings and pay fees first (which Washington has originally proposed). This is important for two reasons. First, the new rules from Washington will allow companies to gauge investor intent before incurring the costs of lawyers and filing fees, and without fear of sanction by the state securities regulator for not making any filings (of course, misleading statements are still actionable under state and federal securities law). Second, Washington is the lead state for NASAA's Regulation A Coordinated Review Program and many other states are looking to Washington's lead on how to handle testing the waters under Tier 2 of Regulation A.
Specifically, the adopted rules require that issuers to file a completed Tier 2 notice filings form, consent to service of process, and its filing fee to Washington at least 21 calendar days prior to the initial sale in the state. The practical effect is that the issuer has control over the timeline of the offering and need only file with Washington when it is clear that there is enough interest in the offering from prospective investors to proceed. As an added bonus when it is time to make the notice filing, issuers will have a better idea of investment interest in Washington and may choose to offer only a fraction of the total offering in the state, thereby reducing the filing fees owed.
The new rules out of Washington are a significant improvement over the original proposal and reflect an attitude that is supportive of innovation in capital formation for small and early-stage companies. Now it is up to every other state to follow Washington's lead and allow Tier 2 offerings to be an efficient and effective tool for small companies to raise capital.