Reg A is a mini-initial public offering (“IPO”) because the requirements are more flexible than traditional IPOs since it requires less time and resources. Thus, Reg A can be a budget-friendly option for small to mid-sized companies trying to raise capital when selling securities.
What is a Regulation A+ Offering and is it Right for Your Company?
What is a Regulation A+ Offering?
Regulation A+ (“Reg A”) is an exemption under section 3(b) from the Securities Act of 1933 (the “Act”) registration requirements. Reg A has since been amended by the 2012 JOBS (Jumpstart Our Business Startups) Act and again in 2020. As amended, Reg A is commonly referred to as Reg A+. This exemption allows companies to avoid fully registering with the Securities and Exchange Commission (“SEC”) and still publicly offer securities. Essentially, Reg A is a mini-initial public offering (“IPO”) because the requirements are more flexible than traditional IPOs since it requires less time and resources. Thus, Reg A can be a budget-friendly option for small to mid-sized companies trying to raise capital when selling securities.
Tier 1 and Tier 2 Under Regulation A+
As amended, Reg A + permits two tiers for a company to offer or sale securities: Tier 1 or Tier 2. In any 12-month period, an issuer who offers $20 million or less can select either tier.
Under Tier 1, a company is permitted to raise up to $20 million (including up to $6 million in affiliate secondary sales) in a 12-month period. Some benefits of this tier include everyone (accredited and non-accredited investors alike) having the ability to invest and financial statements are not required to be audited. Additionally, there are no ongoing reporting obligations aside from filing a Form 1-Z exit report. A potential downside to Tier 1 is that a company will generally need to comply with blue sky registration and qualification requirements in every state the securities will be offered.
Alternatively, under Tier 2, a company is allowed to raise a maximum of $75 million (including up to $22.5 million affiliate secondary sales) in a 12-month period. Issuers utilizing this tier have more obligations to abide by than Tier 1. For example, the financial statements must be audited, and the issuer must adhere to Regulation S-X (i.e., The rule on requirements for companies’ annual reports and financial statements.). Moreover, a company will be subject to ongoing disclosure obligations comparable to a reporting company. Unless the securities are listed on a national securities exchange upon qualification, there are limits for investments by non-accredited investors such as a 10% limit of a person’s annual income or net worth and a 10% limit of an entity’s annual revenue or net assets. However, the issuer is generally not required to abide by blue sky laws.
Should My Company Do a Reg A+ Offering?
Reg A+ is available to companies organized and based in the United States or Canada. Reg A+ allows a company to “test the waters” and see what the market interest is before committing to a registration. Additionally, the exemption can expand a company’s pool of potential investors because non-accredited investors are permitted to invest (with or without restrictions depending on the tier) thus giving a company the ability to pool capital from the general public. Companies filed under Reg A+ can broadly solicit and generally advertise their offerings. If the company is highly marketable, pooling capital from the general public becomes easier and more effective.
As mentioned above, Tier 1 does not require audited financials which can be a significant cost reduction for companies. According to the Wall Street Journal, getting financials audited can cost a small company anywhere between $5,000 to $75,000. However, it is important to note that Tier 1 can become pricy and time consuming because the company will be required to register with each individual state but if a company only plans to sell in a few states and needs less than $20 million in capital, Tier 1 could be a good choice.
If a company plans to offer or sell securities federally and needs more than $20 million in capital, Tier 2 could be a better fit. Companies filing under Tier 2 can use ongoing reporting to their advantage to build their internal financial reporting infrastructure in preparation for an actual IPO. Tier 2 tends to be less time consuming than Tier 1 because it is exempt from state-by-state blue sky laws.
Companies NOT eligible for Reg A+ offering include:
- Companies required to be registered under the Investment Company Act of 1940 and are not eligible to file pursuant to Reg A+.
- Investment Company Act of 1940 regulates investment companies (i.e., any company whose main purpose is to invest, re-invest, trade securities and whose own securities are available to investing public).
- Blank Check companies, which is a company that has no specific business plan nor purpose and has not shown that it is planning to merge or acquire an unidentified company, person, or entity.
- Companies who fall under the “Bad Actor Rule.”
- Companies with criminal convictions, SEC disciplinary orders, or other issues become disqualified under the “bad actor” rule.
- Issuers of fractional shares in oil, gas, or other mineral rights.
This blog is available for informational purposes only and does not, and is not intended to, constitute legal advice on any subject matter. By viewing this blog, the reader understands there is no attorney-client relationship established between the reader and Wilson Bradshaw LLP. Readers are urged to consult legal counsel regarding any specific legal questions about a specific situation.