Public sales of securities is an appealing way for a company to raise a significant amount of money, but an IPO is not always a feasible option for early-stage startups and companies still developing. The reporting requirements for years to come can be too burdensome for a new business. Regulation A and Regulation A+ allow a company to take advantage of these benefits without having to go through the entire legal ordeal of an IPO.
If your company is considering a public offering but does not yet have the capabilities necessary for an IPO, it may be worth discussing the option of Regulation A with a securities attorney. A Priori financing and securities lawyer can help guide your company through the offering process.
Understanding Regulation A and Regulation A+
Regulation A is an SEC exemption from the typical full disclosure and registration requirements associated with public offerings of securities. Under Regulation A, companies can make smaller public offerings with fewer requirements and less regulation than they would be subject to in an IPO. Unlike many private offerings of securities, Regulation A offerings can be freely advertised.
For many years, Regulation A was rarely used, due in large part to the fact that companies were still subject to blue sky rules for registration, but equity crowdfunding rules under Title IV of the JOBS Act created Regulation A+, which has since been integrated into Regulation A. Under Regulation A+, federal review and law preempts state review under certain circumstances. This makes Regulation A much more appealing to companies seeking investment from investors in multiple states.
How Reg A Offerings Work
There are two basic ways that companies can offer securities under the Regulation A exemption.
Under Tier 1 of Regulation A, any company can raise up to $20 million in any 12-month period by selling public securities to both accredited and non-accredited investors. The requirements for the offering circular are also lower—financial statements do not have to be independently audited and disclosures are subject to less federal scrutiny. While technically a public offering, Tier 1 does not require companies to fulfill any of the ongoing reporting requirements typically associated with public companies subject to the SEC.
Under Tier 2 of Reg A (commonly known as Reg A+), any company can raise up to $50 million in any 12-month period by selling public securities to both accredited and non-accredited investors. If a company participates in a Tier 2 offering, they do become subject to SEC reporting, but to a lesser extent than other public companies. Offerings under Tier 2 of Regulation A require the company to submit only a semiannual and annual report, not quarterly reports. They also may have to file reports if the company experiences certain material changes, but only for specifically enumerated events.
Tier 2 of Reg A even allows for listing of the securities on public exchanges; however, these offerings are subject to the listing requirements for that particular exchange. In practical terms, this generally will be the same requirements expected by an IPO, including quarterly ongoing reporting.
All Reg A offerings must be accompanied by a disclosure document called an offering circular. The offering circular, also called an offering memorandum, contains information on the company, as well as the risks involved in purchasing the relevant securities and what money raised will be used for. Essentially, the offering circular is a shortened or summarized version of the full prospectus that would be required for an IPO. The offering circular must be qualified by the SEC before any securities can be sold (and also state securities regulators in the states where the offering is being conducted if it is a Tier 1 offering).
For Tier 1 Reg A offerings, there are no limitations on how much any given investor can invest. Tier 2 offerings, however do have certain limitations. Generally speaking, if securities are not going to be listed on a national securities exchange upon qualification, non-accredited investors can invest no more than 10% of their annual income or net worth (whichever is greater).
Who is an accredited investor for the purposes of Regulation A offerings?
An accredited advisor is any person with an annual income of at least $200,000 (or $300,000 jointly with a spouse) or a net worth of $1 million.
What is NASAA coordinated review?
NASAA coordinated review is a streamlined protocol under which a securities filing can be registered in multiple states through a single process in order to reduce regulatory hurdles and compliance costs. Coordinated review for Regulation A is available as an option, but not required.
What is the difference between a Reg A and a Reg D offering?
Reg A and Reg D offerings both reduce the SEC registration requirements for an offering, but they deal with different exemptions. Reg A deals with small public offerings, while Reg D deals solely with private placements.