The Securities and Exchange Commission checked another item of its JOBS Act to-do list Wednesday by issuing a proposed rule to modernize the little-used Regulation A registration exemption.

Regulation A was intended to provide a simple and inexpensive way for small businesses to raise limited amounts of capital, but Congress pushed a rethinking of the exemption because so few issuers use it. Only one qualified Regulation A offering occurred in 2011. In 2012, eight Regulation A offerings raised less than $35 million, compared to 7,7000 issuers who raised nearly $7 billion using more popular Regulation D exemptions.

A recent study by the Government Accountability Office found that that, for many issuers, the limited amount that could be raised didn't justify accompanying compliance demands, including a wide range of state blue sky laws designed to protect investors.

The proposal preserves the existing Regulation A framework, but adds a “second tier” issuers may also take advantage of. It retains the current offering threshold, up to $5 million in any 12-month period (and up to $1.5 million in securities sold by stockholders), subject to state securities review. The new tier allows an exemption for offerings of up to $50 million during a 12-month period, including up to $15 million in securities sold by stockholders. It would preempt state Blue Sky laws and instead subject issuers to the SEC's continuing disclosure regime and audited financial statements. 

Issuers taking advantage of “Regulation A+” offerings are required to submit an offering statement to the SEC. It can initially be submitted confidentially for staff review, and later filed electronically via the EDGAR system.The proposed rule also limits investors to 10 percent of their net income or net worth, whichever is greater.

An analysis by the law firm Morrison Foerster explains that the new exemption will be available to non-reporting companies organized in the U.S. or Canada. It would exclude investment companies, companies delinquent in their filing requirements, that have no specific business plan, or  are disqualified under proposed “bad actor” disqualification rules.

While supporting the proposed rule, SEC commissioners Michael Piwowar and Kara Stein suggested adding an intermediate tier, perhaps for offerings of $10-$15 million. Piwowar suggested it preempt state blue sky laws and have less extensive continuing disclosure obligations than Tier 2 offerings. Stein pushed for greater state-level oversight.

While voting in favor of the proposal as a means to solicit public comment, Stein expressed some reservations, including that it “does not yet achieve the appropriate balance between promoting capital formation for issuers and protecting investors.” It “explicitly preempts the state securities laws” for offerings relying upon the new exemption, going beyond what Congress directed, and “fails to make any real attempt to make the old Regulation A work,” she said.

“We just proposed a rule for Crowdfunding that includes greater investor protections than the Tier 1 proposal before us today, despite the fact that issuers can raise up to $5 million from retail investors in a Tier 1 offering, and only $1 million through Crowdfunding,” she added.

Chairman Mary Joe White said the proposal explores alternative approaches to balancing the respective roles of federal and state securities laws. She cited a recent proposal by the North American Securities Administrators Association for coordinated reviews of Regulation A offerings that, "if fully implemented, could potentially reduce the costs of compliance with state securities law obligations and enhance the speed of state-level review."

An SEC fact sheet on the rule is available. A 60-day comment period will commence upon publication in the Federal Register.