US Government Shutdown Slams the Breaks on Reg A+ Issuers. Is there an Alternative to Fix the Logjam?

There has been a good amount of discussion about the impact of the government shutdown and the effect on government employees who are not being paid.  The shutdown is also undermining sectors of the economy that depend on furloughed public employees. One sector of finance that has been halted in its tracks is Regulation A (Reg A+) issuers that need the approval of the Securities and Exchange Commission (SEC) staff to move forward with a securities offering.

Late last month, CI highlighted what the government shutdown meant to the SEC. A few days later, the SEC’s Division of Corporate Finance outlined the impact for Reg A+ issuers.

“Regardless of our operating status, EDGAR will accept registration statements, offering statements and other filings; however, as discussed below, during a shutdown we will not be able to declare registration statements effective nor qualify Form 1-A offering statements.”

Sara Hanks, founder and CEO of Crowdcheck – and a securities attorney active in the Reg A+ space, recently published a blog post lamenting the conundrum for Reg A+ issuers.

Hanks, a former SEC Staffer, said that Reg A+ offerings are typically used by smaller firms as an alternative to an angel or VC funding. She described these companies as being familiar with the “Valley of Death”  – when companies are not big enough to gain VC interest and where a lack of capital can halt even a good idea from getting funded. Right now, Reg A+ is dead in the water as SEC staff is not available to review, nor qualify, these offerings.

Hanks has a novel solution to address the logjam. She posits that, perhaps, SEC Commissioners could qualify these filings – at least the ones submitted before the government closure which were able to be reviewed by CorpFin.


We asked Hanks if this concept was realistic?

“I don’t know what is realistic here on the other side of the rabbit hole. I don’t know if this theory works, but it seems like it might be reasonable from a policy point of view,” says Hanks. “I am just hoping that there might be some sympathy towards finding a solution for companies who have done everything they should and who were counting on being able to raise funds by now, to pay their employees and build neat products.”

As she deals with Reg A+ issuers every day, we asked Hanks how many of her clients have been impacted by the furloughed SEC staff:

“We have three issuers who are just waiting for the SEC to come back to qualify them, including one whose qualification request was filed just after shutdown. We have a further two issuers who have responded to the Staff’s comments and we would hope we’ve answered everything they asked. Both of these are tech companies and a Staffer told us that one of them was “a nice little company; just the sort of issuer we hoped would use Reg A.”

Of course, the extensive delay may mean a significant backlog once the SEC staff returns to their desks. Hanks says there will be a huge pile of filings in the Staff’s inbox. And it’s getting taller.

“I would think that the Staff might search the pile of filings and triage them, and let the companies who pose the least risk to investors, such as repeat issuers and those who’ve responded to comments, go ahead and get qualified.”

During normal times, Hanks tells Reg A+ issuers (non-token ones, at least) to allow three months or so for the entire SEC qualification process. For the foreseeable future, expect this process to take much longer.

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