Preparing for an A+ grade: State antifraud authority and your notice filings

In an earlier blog post, we mentioned that while Regulation A preempts state review of offerings under Tier 2 of Regulation A, states are still given the authority under Section 18 of the Securities Act to require issuers selling securities under Regulation A to make notice filings and pay filing fees before they can offer securities in the states. Section 18 also preserves the states’ authority to enforce their respective antifraud statutes.

Since our last blog post, 40 states and the District of Columbia have adopted notice filing requirements. CrowdCheck assists many issuers in making their notice filings. Historically, once a filing was submitted, we would never hear from the state again, other than receiving an acknowledgement or notice of effectiveness. Over the past few months we have seen a change in the way state regulators react to notice filings made under Tier 2 of Regulation A.

In particular, we have noticed that several states are issuing comments in connection with notice filings under their antifraud authority. Several states conduct bad actor (or in the case of Arkansas “bad boy”) background checks and may not accept the notice filing if they believe that an issuer’s offering circular does not sufficiently disclose past regulatory or other legal actions that are not explicitly required under Form 1-A that they believe need to be disclosed for the statements in the offering circular to not constitute a material omission. We have also seen state regulators question an issuer’s name on the grounds they thought it might be materially misleading, and challenge an issuer’s compliance with disclosing broker-dealer compensation in Part I to the Form 1-A filed with the SEC.

State regulators also clearly share their comments with other regulators. In at least one instance, a state securities regulator has withheld effectiveness of a notice filing until the issuer resolved a comment that another state had issued.

Failure to resolve comments and receive confirmation that a notice is effective in a state has both practical and legal consequences. As a practical matter, issuers conducting Regulation A offerings should leave sufficient time to make their notice filings and to work through any comments such that their notices are effective prior to commencing sales in the notice states. As a legal matter, if an issuer makes sales in a notice state prior to notice effectiveness, the remedies available to states include imposing a consent order and fine or requiring an issuer to conduct a rescission offer, which would require a different Regulation A filing and review by the SEC. Even in instances in which an issuer agrees to revise its disclosure, state regulators may take the view that the original disclosure violated state antifraud statutes and issue a letter of caution.

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