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What is it and Will it Work
For My Business?
When I began to practice as a securities attorney in 2011, I researched intently each exemption from registration eagerly anticipating the day when I could whip out my arsenal of exemptions, like a Swiss Army knife, when asked by a potential client about raising capital in a private transaction. What I quickly realized was that my Swiss Army knife essentially only consisted of one blade and that blade was Rule 506. of Regulation D (“Reg. D”). At that time, the one real downside to Rule 506 was the prohibition against “general solicitation,” which was addressed directly with the adoption of Rule 506(c) of Regulation D in 2013. At that time, although an exemption under Regulation A (“Reg. A”), on its face, seemed attractive (up to $5 million over 12 months), the fact that Reg. A did not preempt state law and required registration in each individual state never allowed the Reg. A exemption to flourish as a viable competitor to Regulation D. In 2011, only one issuer had an offering qualified under Reg. A.
On March 25, 2015, the SEC adopted final rules to implement Section 401 of the JOBS Act amending Reg. A by expanding Reg. A into two tiers: Tier 1 and Tier 2.
How much can an issuer raise under Reg. A?
Under Reg. A, a Tier 1 issuer can raise up to $20 million in a rolling 12-month period and a Tier 2 issuer can raise up to $50 million in a rolling 12-month period.
Does Reg. A pre-empt state law?
Under Reg. A, offers and sales of securities to “qualified purchasers” under Tier 2 pre-empt state law; however, offers and sales under Tier 1 do not. Tier 1 issuers may coordinate state qualification through NASAA’s Coordinated Review Program for Reg. A Offerings. A timeline for qualification under the program is here. The individual state filing requirements are found here.
Who can invest in an offering under Reg. A?
Anyone (including both “accredited investors” (6) and non-accredited investors) can invest in an offering under Reg. A. Under Reg. A, Tier 2 investors may invest a maximum of the greater of 10% of their net worth or 10% of their net income in a Reg A. offering on a per offering basis. Tier 2 investors do not need to prove they qualify and may self-certify to the issuer compliance with the investment limitation under Reg. A.
Can an issuer advertise an offering under Reg. A?
General solicitation is allowed under Reg. A so issuers may advertise the offering to the public. One of the most effective ways to market an offering under Reg. A is to engage a funding platform that gets traction from investors who are interested in investing in Reg. A offerings. Click here for tips on selecting the right funding platform.
Can Reg. A issuers engage in “testing the waters?”
Reg. A issuers may conduct “testing the waters” activities; however, if a Reg. A issuer conducts any pre-filing “testing the waters” activities, Tier 1 will not be available. In addition, under Reg. A, an issuer who chooses to engage in “testing the waters” activities must include information in its solicitation materials that generally notifies investors that no offer is being made or may be accepted and that any indications of interest from potential investors are non-binding on the Reg. A issuer.
Are there any required filings with the SEC under Reg. A?
In order to begin the qualification process for an offering under Reg. A, both Tier 1 and Tier 2 Reg. A issuers are required to file a Form 1-A with the SEC. The Form 1-A may be filed confidentially as long as it is publicly filed with the SEC at least 21 days prior to qualification of the Reg. A offering. If the SEC has any comments, they will submit them to the issuer in a comment letter and the issuer will have the opportunity to respond. Under Reg. A, the issuer response to each comment letter received from the SEC must be filed. Once the Reg. A offering has been qualified, both Tier 1 and Tier 2 issuers are obligated to file an exit report on Form 1-Z. In addition, Tier 2 issuers under Reg. A are also required to file annual reports on Form 1-K, semiannual reports on Form 1-SA, and current reports on Form 1-U.
Are the securities issued pursuant to Reg. A freely tradable?
The securities issued pursuant to Reg. A are not restricted and are freely tradable. In order provide liquidity to recipients of Reg. A securities, Reg. A issuers will initiate the submission of a Form 211 through a FIRNA-registered broker-dealer. More information about the submission of a Form 211 can be found here.
Under Reg. A, are issuers required to prepare and file audited financial statements?
Although Tier 1 issuers under Reg. A are not required to prepare and file audited financial statements, Tier 2 issuers are. Tier 2 issuers under Reg. A must prepare and file audited financial statements that cover the last two completed fiscal years; however, the financial statements do not need to be prepared by an auditor who is PCAOB-registered.
For many smaller issuers, Reg. A is a game-changer and a better alternative to a public offering or the remaining exemptions from registration. More information on Reg. A can be found here.