The most common exemptions from registration include:
Regulation A or Reg. A+; and
What is the new Regulation A exemption?
On March 25, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement Section 401 of the Jumpstart Our Business Startups Act (the “JOBS Act”) by expanding Regulation A into two tiers. Regulation A now provides for an exemption from the registration requirements of the SEC for offers and sales of securities of up to $50 million during a 12-month period.
What are the two tiers of Reg. A+?
Any issuer who chooses to conduct an offering pursuant to Regulation A must indicate in the offering circular under which tier it has chosen to offer its securities. All investors in a Reg A+ offering must either be provided with an offering circular or given information to access an offering circular. Regulation A offerings can also include resales of securities by selling shareholders. Companies who take advantage of Reg. A+ must be organized in the U.S. or Canada.
Tier I
An issuer who chooses to conduct a Regulation A offering under Tier I can raise up to $20 million in any 12-month period. The offering circular is subject to review and qualification by the SEC as well as the states where the Regulation A offering is being conducted. The fact that Tier I offerings under Reg. A+ need to be qualified by each state where the offering is being conducted is a distinguishing factor from Tier II offerings under Regulation A since qualification in each state can be time-consuming and cost money. Companies who conduct a Tier I offering pursuant to Reg. A+ do not become subject to the reporting requirements of the SEC aside from a final report once the offering is completed. There are no investment limitations for investors in Tier I Regulation A offerings.
Tier II
An issuer who chooses to conduct a Regulation A offering under Tier II can raise up to $50 million in any 12-month period. The offering circular is subject to review and qualification by the SEC only and not individual states where the Reg. A+ offering is being conducted. Companies conducting a Regulation A offering become subject to ongoing reporting requirements with the SEC, including semi-annual, annual, and current reports. Investors in Tier 2 Reg A+ offerings who are not “accredited investors” have investment limitations of no more than 10% of the greater of the investor’s, alone or together with a spouse, annual income or net worth (excluding the value of the investor’s primary residence and any loans secured by the residence (up to the value of the residence)).
What are the benefits and downsides of using a Regulation A exemption in an offering?
The benefits to using a Reg. A+ exemption are as follows:
General solicitation is permitted;
Shares are not restricted and may be immediately resold;
Limited disclosure requirements for Tier I and not as extensive reporting requirements for Tier II offerings compared to being a reporting company with the SEC;
Delayed and continuous offerings allowed;
Can raise up to $50 million over a 12-month period;
Audit does not have to be performed by a PCAOB auditor; and
Investors don’t have to be “accredited investors.”
The downsides to using a Regulation A exemption are as follows:
Tier I offerings subject to review of individual states where offerings are conducted;
Tier II issuers become subject to SEC reporting; and
Investors in Tier II offerings who are not “accredited investors” are subject to investment limitations.
In conclusion, starting a private offering, including the preparation of required disclosures and federal and state compliance, can be a complicated and difficult process. Business Legal Advisors, LLC has over seven years of experience assisting companies with private offerings, from preparing for the private offering to the completion of a successful offering. Contact us today for a free consultation.