Regulation A (a.k.a. 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 in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period.
What we like about Reg A. First, Reg A can be used in a direct public offering, which allows a venture to offer an investment opportunity 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 $5 million.
Public offering. Securities in a Reg A offering can be offered publicly, using general solicitation and advertising.
Testing the waters. The “test the waters” provisions of Reg A allow companies to solicit interest in their contemplated securities offering before filing an offering statement with the SEC. This gives companies the opportunity of being able to determine whether enough market interest in their securities exists before they incur the full range of legal, accounting, and other costs associated with preparing and filing an offering statement with the SEC. Companies that “test the waters” under Regulation A are required to include certain language, or legends, in their solicitation materials that generally notifies investors that no money for securities is currently being solicited or will be accepted, if sent, and that any indications of interest received by the company from potential investors are non-binding. If the “test the waters” provision is used, issuers may only proceed with Tier 2 offerings.
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.
Disclosure and financial requirements. Tier 1 and Tier 2 issuers are required to provide balance sheets and other required financial statements for the two most recently completed fiscal years or for such shorter time that the company has been in existence. Issuers in Tier 2 offerings are required to include audited financial statements.
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. Issuers of Tier 2 offerings are required to file ongoing annual reports and semi-annual reports, current event updates as well as a filing after the termination or completion of an offering.
Integration with other offerings. Reg A has several safe harbors so that a Reg A offering will not be integrated with any previously closed offerings, a subsequent crowdfunding offering and in cases where the issuer can comply with the terms of both offerings independently such as conducting a simultaneous Reg D, Rule 506(c) offering.
Resale. Securities sold in a Regulation A offering are not considered “restricted securities” for purposes of aftermarket resales. “Restricted securities” are securities issued in private offerings that must be held by purchasers for a certain period of time before they may be resold.