INSIGHTS

SEC Levies Civil Penalties Against 10 Microcap Companies for Regulation A Violations

May 30, 2023

The Securities and Exchange Commission announced on May 16, 2023 that ten microcap companies violated Regulation A+ and have been ordered to pay civil penalties ranging from $5,000 to $90,000. In a press release, Daniel R. Gregus, Director of the SEC’s Chicago Regional Office, stated, “Companies that choose to benefit from Regulation A as a cost-effective way to raise capital must meet its requirements. These actions stand as a reminder that companies which choose to circumvent Regulation A’s requirements by engaging in prohibited conduct or making fundamental changes to their offerings without qualification will face action by the SEC.”

Generally known as “Reg A+”, this registration exemption gained market traction after amendments to the original Regulation A were passed as part of the Jumpstart Our Business Startups (JOBS) Act, enacted in 2012 and effective in 2015. Reg A+ provides an exemption from registration under the Securities Act of 1933 for U.S. and Canadian companies to raise up to $75 million in a 12-month period. In order to qualify for the exemption, a company must file with the SEC a Form 1-A describing its business and the terms of its offering, and have the Form 1-A qualified by the SEC before an offering may be commenced. Securities issued in a Reg A+ offering are not resale restricted under Rule 144 for persons unaffiliated with the issuer. Affiliates of the issuer, however, remain subject to Rule 144 resale restrictions.

Depending on the size of the Reg A+ offering, an issuer may have certain ongoing reporting requirements such as the filing of quarterly and annual statements.  An issuer is also required to file an amendment to Form 1-A, which must be qualified by the SEC, if it makes material changes to the size or terms of an on-going offering.

Each of the ten companies subject to monetary penalties by the SEC had their Form 1-A “qualified” by the SEC, but subsequently made material changes to their offerings without appropriately amending or updating their offering materials, or failed to timely comply with certain periodic reporting requirements. The SEC stated that the changes included “improperly increasing the number of shares offered, improperly increasing or decreasing the price of shares offered, failing to file updated financial statements at least annually for ongoing offerings, engaging in prohibited at the market offerings, or engaging in prohibited delayed offerings.”

To the extent you are contemplating a Reg A+ offering, or are conducting an on-going Reg A+ offering, we highly recommend reviewing the offering and related disclosure for compliance with the applicable rules.  Issuers may avoid significant monetary penalties from the SEC by ensuring that their disclosure meets applicable rules, and amendments are timely filed as necessary.   Please contact Crowell & Moring LLP if you have any questions or concerns related to your Reg A+ financing.