Regulation A Revamp Increases Exemption Viability

January 12, 2017 by Kevin S. Kim, Esq.

Regulation A was established by the Securities Act of 1933, but its restrictive $5 million offering limit, coupled with exorbitant compliance prices, made this exemption financially impracticable for a significant portion of capital-seeking corporations. However, new alterations have increased the viability of Regulation A by increasing the offering limit and implementing additional changes that make it more appealing for certain companies.

The updated exemption, also known as Regulation A Plus (Reg A+), features a bifurcated securities framework about equity, debt, and convertible debt securities. Tier 1 offerings have an annual limit of $20 million, while Tier 2 offerings have a $50 million cap.

These two classifications share several regulatory characteristics. The offerings are restricted to only American and Canadian companies or start-ups with approved business plans. Investment businesses required registering under the Investment Company Act of 1940 or reporting to the SEC, business development organizations, with blank check companies being excluded from using Regulation A Plus.

Additionally, any organization whose executive staff previously engaged in certain fraudulent activity are considered “bad actors” and are denied from using Regulation A. Potential issuers must also remain compliant and up-to-date with all applicable anti-fraud and security provisions.

Companies seeking either tier offering are also required to declare an offering statement on Form 1-A before selling any securities. Offering statements are comprised of an offering circular, which is shared with investors, and specific exhibits and additional information that only needs to be filed with the SEC. Furthermore, Form 1-A mandates, among other items, an overview of the business and its utilization of proceeds, associated risks, financial standing, personnel bios and disclosure of executive salaries.

Regulation A allows for general solicitations and marketing practices, permitting an unlimited number of private offerings and general public solicitation either before or following the official filing of the offering statement as long as any resources used after filing have attached preliminary offering circulars or similar notices providing potential investors a means to obtain updated offering circulars. Securities garnered via Regulation A are not considered restricted securities and thus freely tradable.

Tier 1 and Tier 2 offerings differ in some key aspects in addition to their associated offering maximums. All investors, regardless of accreditation status, may take advantage of Tier 1 offerings. With the exception of securities to be listed on a national securities exchange, Tier 2 is only available to accredited investors or buyers whose investments do not exceed 10% of their annual income or net worth—whichever is greater.

Tier 2 offering statements must incorporate audited financial statements but are not required to be qualified under state law, whereas Tier 1 offering statements allow unaudited financial documents but must either be qualified or exempt from qualification under relevant state legislation. Furthermore, Tier 2 companies must provide audited annual, semiannual and current event updates to the SEC. For those Tier 1 issuers with SEC qualified offerings, the only filing requirement is exit reports submitted within thirty days of an offering’s expiration date.

While the Reg A market is in its relative infancy, it continues to grow exponentially. Just last month, the SEC Qualified 12 new companies for offerings. That brings the total to 74 businesses that have Qualified in 2016, for a total scheduled $1.6 billion in capital raise, with the number of approvals projected to increase over the next several months. It is estimated that eleven companies have already raised more money than their SEC Qualified minimum amounts, demonstrating exceptional market interest.

Since June 2015, when Title IV of the JOBS Act was implemented, the amended exemption has provided the opportunity for non-accredited investors worldwide to participate in Qualified offerings from U.S. and Canada-based companies. While the rules are designed to allow more mid-size or late startups to raise capital, across a wide-range of the companies recently approved for A+ offerings, many are mature and a more suitable option for this type of capital raise. With safeguards in place and a strong group of newly approved Reg A+ Offerings, building consumer confidence and interest in this type of investment is showing to be a roaring success.