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Recently, the Securities and Exchange Commission’s (SEC) amendments to Regulation A (often referred to as Regulation A+) became effective. These amendments exempt from the registration requirements offerings of up to $50 million securities in a 12-month period.

Prior to these amendments, which became effective June 19, 2015, Regulation A was largely irrelevant due to its $5 million offering limit. These amendments, adopted by the SEC pursuant to §401 of the Jumpstart Our Business Startups (JOBS) Act, are designed to allow issuers organized or with places of business in the U.S. or Canada to raise capital through the issuance of equity, debt securities, or debt securities convertible or exchangeable into equity interests in offerings in an amount up to $50 million in a twelve-month period. Offerings conducted under Regulation A are exempt, but require a qualification filing and certain blue sky law compliance.

Tier 1 offerings allow for primary offerings during a 12-month period of $20 million and secondary offerings by shareholders of $6 million. Tier 2 offerings allow for primary offerings during a 12-month period of $50 million and secondary offerings of $15 million.

Benefits of Regulation A+

The SEC has designed Regulation A+ to allow for more fluid capital raising. Under the new rules:

  1. There are no transfer restrictions on securities issued (unlike under Regulation D);
  2. Securities may be offered to non-accredited investors in amounts up to $50 million in a 12-month period; and
  3. Written or oral offers can be made prior to qualification of the preliminary offering circular.
    • Written offers may be made before qualification if a preliminary offering circular is provided bearing certain legends. 
    • Oral offers may be made; provided, the offering statement is filed with the SEC (if not yet qualified)
  4. Issuers may also test the waters. Solicitations of interest and other communications may be made provided certain requirements are complied with, which are outlined in Rule 255. 

Regulation A offering disclosures

Under Regulation A, an issuer that seeks to conduct an offering falls into one of two disclosure regimes: Tier 1 or Tier 2. Both regimes require filing of an offering statement, including a preliminary offering circular that includes two years of financial information. Under Tier 1, within 30 days of the termination or completion of the offering the issuer must file an exit form on Form 1-Z. Under Tier 2, an issuer that has conducted a Tier 2 offering is required to file an annual report on Form 1-K containing audited financial statements, semi-annual report on Form 1-SA with unaudited financial statements for the six-month period, and current reports on Form I-U, which are similar to Form 8-K requirements for material events but less robust.

Regulation A v. Regulation D

Regulation A, unlike Regulation D, does require that the offering be reviewed and qualified by the SEC. However, Regulation A also provides a pathway forward that enables Tier 2 issuers to be more communicative with their shareholders through paired down reporting requirements of Regulation A (as compared to the more robust requirements under the Securities Exchange Act of 1934, as amended). Issuers with long-term growth plans or existing private equity investors may choose Regulation A as a mechanism for shareholder engagement. For additional information on the various exempt offerings see the chart that follows this alert.

Regulation A offerings feature the inclusion of an unlimited amount of non-accredited investors for Tier 1 and Tier 2, with certain Tier 2 offerings being subject to certain investment limits for non-accredited investors (see chart above). Likewise, securities issued under Regulation A are not subject to transfer restrictions typical of other exempt offerings.

Who should consider Regulation A?

The JOBS Act sought a more efficient offering mechanism to encourage domestic businesses toward growth. Regulation A+ is designed to provide issuers a more flexible approach to conducting offerings over $5 million with over 35 non-accredited investors. For example, Tier 1 offerings of $20 million or less allow issuers to raise capital from an unlimited number of non-accredited investors and accredited investors, without restrictions on transfer placed on securities.

The Tier 2 offering provides an IPO-light alternative. This offering alternative is suitable for (1) established companies in the later stages of their growth, but not ready to go forward with an IPO, or (2) businesses that choose to continue their growth path without the expense of an IPO. For these later-stage businesses, the ability to raise up to $50 million provides a much more expansive exemption and the ability to seek capital from both accredited investors and non-accredited investors in a meaningful capital raise.

The secondary offering provisions under Regulation A may also be useful to closely-held businesses seeking to keep capital in the business while simultaneously allowing shareholders to divest of substantial stakes without requiring a sale of the entire business.

Issuers that are not already subject to SEC reporting requirements under the Exchange Act but that will be after an offering of up to $50 million annually may also choose to use Regulation A for their offering. The less expansive disclosure requirements under Regulation A, as compared to the requirements under Form S-1 under the Exchange Act, should allow for more expeditious capital raising.

For additional information on Regulation A or other securities law questions, please contact the attorney listed below.

Chart 2

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