Regulation A and the Jobs Act: A Failure to Resuscitate

Abstract

Regulation A offers small businesses an exemption from the registration requirements of the Securities Act of 1933. The exemption is generally consistent with the obligation of the Securities and Exchange Commission to fashion exemptions that balance investor protection and capital formation. From the perspective of small businesses, the exemption may appear to provide an efficient access to external capital.Regulation A, however, has fallen into nearly complete disuse. The millions of small businesses in this country, all of which at some point need external capital to survive and grow, simply do not use Regulation A.Two reasons account for small businesses’ non-use of Regulation A. First, the disclosure and filing requirements for Regulation A are somewhat out of balance, unnecessarily increasing the relative offering costs. Second, and much more important, is the impact of the registration provisions of state securities laws. The added burden – and expense – of meeting the state registration requirements simply price Regulation A out of the marketplace for exemptions.Congress recently passed the Jumpstart Our Business Startups Act (the JOBS Act). Title IV of the JOBS Act delegates to the Commission broad authority to enact new regulations that cure the problems that made Regulation A unusable.Unfortunately, it is unlikely that the Commission will step up to its responsibility to enact regulations that provide small businesses with efficient access to external capital. Historically, the Commission has shown an unwillingness to expand by regulation the preemption of state authority over the registration of securities. Without preemption, the new regulatory regime under Title IV of the JOBS Act will be useless to small businesses in search of external capital.Such an outcome would amount to an abdication of the Commission’s responsibilities to enact regulations that balance investor protection and capital formation.