In August 2020 the SEC released a report comparing the performance of Regulation A, Regulation D and registered offerings. Congress requested the report due to its concern that enormous growth in private securities issuance meant that investors may not be getting the liquidity, transparency, price-efficiency, accountability, pricing accuracy and low trading costs that are hallmarks of securities that are registered and publicly traded.
Solomon Exam Prep students know that when companies want to raise money they can issue equity or debt securities in the public markets, but in accordance with the requirements of the Securities Act of 1933, these issuing companies must register their securities with the SEC. Securities registration is considered to be a time-consuming and expensive process. However, companies may side-step registration by issuing securities that are exempt from registration. Two common types of exempt offerings are Regulation A offerings and Regulation D offerings. Regulation A offerings are for U.S. and Canadian issuers who wish to raise funds under $50 million. Regulation A offerings are open to all investors but issuers of Regulation A offerings must file an offering statement with the SEC. Securities offered under Regulation D require much less paperwork, but they are often available only to accredited investors and resales are restricted. Both Reg A and Reg D offerings allow companies to speed up the capital raising process, while reducing compliance costs and disclosure requirements.
The SEC report covered the years 2009-2019 and it showed some interesting findings:
- In 2019, registered offerings accounted for $1.2 trillion (31 percent) of new capital, compared to approximately $2.7 trillion (69 percent) that the SEC estimates was raised through exempt offerings. Of this, the estimated amount of capital reported as being raised in offerings under Rule 506(b) and 506(c) of Regulation D was approximately $1.6 trillion.
- There has been a steady increase in the number of offerings and the amounts raised in Regulation D offerings.
- While Regulation A offerings also increased in popularity, significantly less money was raised under Regulation A. In fact, 1,000 times more money was raised through Regulation D offerings than Regulation A offerings.
- Among Regulation D issuers that were not funds, most issuers were in the banking/financial, technology and the real estate industries.
- Reporting companies that raised money through Regulation D offerings grew faster, but had lower profitability and lower stock price returns than companies that raised money through registered offerings. The SEC adds a caveat that these reporting companies are not representative of the larger set of private companies that raise money under Regulation D.
- Most issuers of Regulation D offerings were headquartered in California, New York, Texas, Florida, and Massachusetts
- The majority of Regulation A issuers lacked a liquid secondary market for their securities. But this may change because the SEC now permits reporting companies to raise money under Regulation A, where previously it was limited to non-reporting companies
- Between 2009 – 2019, 36% of IPOs had previously filed a Regulation D offering.
- One year after a Regulation A offering, 81% of the issuers continued to make reports to the SEC. Three years after the offering, 46% of the issuers continued to make reports to the SEC. This can serve as a rough proxy for the survival of the company and therefore the risk to an investor. But a company that does not make SEC reports does not necessarily mean it has gone out of business.
To read the “Report to Congress on Regulation A / Regulation D Performance” yourself, go to: https://www.sec.gov/files/report-congress-regulation-a-d.pdf.