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OTC, Smaller Reporting Companies Welcome Regulation A Changes

Jul 10, 2018

President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) in May 2018. One of the main facets of the Act is a provision that now allows SEC reporting companies to use Regulation A prior to an IPO—exempting them from SEC registration requirements. The goal here is to increase the access to capital, particularly for smaller companies, many of which are in the technology and life sciences space. 

Regulation A is available for companies offering up to $20 million (Tier 1) and offerings up to $50 million (Tier 2). Companies can include those listed on stock exchanges as well as sold over-the-counter.

This particularly benefits smaller companies by offering them (1) the chance to streamline the process by avoiding state securities laws through OTC trading, as many of them do not trade on the NYSE or NASDAQ; (2) greater investor outreach prior to an IPO; (3) less burdensome solicitations to retail investors; and (4) an expedited and more affordable IPO process, such as by the ability to file a Form S-3.

Smaller companies would be wise to consider leveraging the newly revised Regulation A as a quicker, cheaper alternative to raise capital. There are still certain groups of issuers that are not eligible to use Regulation A for various reasons. As such, a business advisory firm with expertise in this particular area could add tremendous value to a firm’s efforts.

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