Regulation A (also call Reg A or Reg A+) was revised in March 2015 in order to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Reg A is an exemption from registration for public offerings, but the disclosures required under this exemption are similar to those required in registered offerings. The revised Reg A includes two offering tiers: Tier 1 for offerings of up to $20 million and Tier 2 for offerings of up to $75 million, in a 12-month period.
What we like about Reg A. First, Reg A can be used as a direct public offering, which allows a social enterprise to offer an investment opportunity directly to their whole community and not limit investors to only the wealthiest in their networks. Companies can also advertise and market their offering to have the greatest potential reach. Second, it has advantages over other DPO strategies: Unlike the intrastate strategy, investors can come from multiple states; and unlike Rule 504, it can be used to raise more than $10 million.
Public offering. Securities in a Reg A offering can be offered publicly, using general solicitation and advertising. An issuer can choose to use an intermediary broker or offer the securities without one.
Testing the waters. New rules allow a company that has not yet decided on a particular offering strategy to do a generic solicitation of interest – either publicly or privately – from potential investors to help it decide. The company must keep copies of the testing-the-waters materials; and if it ends up doing a Reg A or Reg CF offering it must file those materials with the SEC. No money can be solicited or accepted while testing the waters. Specific disclosures must be included in the testing-the-waters materials (for example, a statement that indications of interest are non-binding). Note that a subsequent offering must still comply with all of the requirements for the chosen strategy. This means that if a company does a public testing-the-waters (i.e. with general solicitation or advertising) and then chooses to do a private offering, the company will need to follow the integration rules and ensure that the private offering does not involve general solicitation. Also, note that the federal rule on testing the waters expressly does not preempt state laws.
Investor limitations. Both accredited and non-accredited investors may invest in Tier 1 and Tier 2 offerings. However, additional limitations apply on the amount of money a non-accredited investor may invest in a Tier 2 offering. A company seeking qualification pursuant to Tier 2 is required to limit the amount of securities that a non-accredited investor to no more than:
- 10% of the greater of annual income or net worth (for natural persons); or
- 10% of the greater of annual revenue, or net assets at fiscal year-end (for non-natural persons)
State preemption and registration. Tier 2 offerings, once approved by the SEC, are nationwide and issuers are not required to register or qualify their offerings with state securities regulators–Tier 2 preempts state registration laws. However, Tier 1 offerings require companies to register or qualify their offering in any state in which they seek to offer or sell securities. Registration requirements vary by state and can be detailed. Regulation A does not preempt state regulations that may require an issuer to register itself or its representatives as agents or brokers.
Disclosure and financial requirements. Tier 1 and Tier 2 issuers are required to provide balance sheets and other financial statements for the two most recently completed fiscal years or for such shorter time that the company has been in existence. Tier 2 issuers’ financials must be audited.
Ongoing reporting. Issuers of Tier 1 offerings are required to update certain issuer information not later than 30 calendar days after termination or completion of an offering in an exit report. Issuers of Tier 2 offerings are required to file ongoing annual and semi-annual reports, current event updates as well as a filing after the termination or completion of an offering.
Integration with other offerings. Under rules that came into effect in 2021, the focus of the analysis of whether concurrent or close in time offerings using different offering strategies will be on whether the requirements of each strategy have been satisfied. If so, there will be no integration.
But lest there be ambiguity about whether a Reg A offering is integrated with other offerings, the SEC has crafted two important “safe harbors” that can give confidence that two offerings won’t be integrated. First, a private offering will not be integrated with a subsequent public offering of any kind, as long as they do not overlap in time. Second, any two offerings that are separated by at least 30 days won’t be integrated, as long as: investors in a private offering that follows a public offering were not reached through general solicitation; or the company had a substantive relationship with investors prior to commencement of a subsequent private offering.
Resale. Securities sold in a Regulation A offering are not considered “restricted securities” for purposes of aftermarket resales but do not have to be registered or listed for trading.