Regulation A+ is an exemption program provided by the Securities and Exchange Commission (“SEC”) providing for the sale of securities to investors (accredited and non-accredited) while also allowing the same public promotion of the offering and investment opportunity as would be provided for in a fully public registered offering. Regulation A+ provides a more streamlined and cost effective method to execute a public offering to raise capital, sell to any investor whether they be accredited or non-accredited, and still maintain status as a private company that is not subject to the same reporting requirements of a fully public company post offering. Further, Regulation A+ issued securities are freely trading from the outset – unlike securities sold under Regulation D which are subject to the Rule 144 transfer restrictions.
Regulation A+ is divided into two offering programs, referred to as Tier 1 ($20 million max) and Tier 2 ($50 million max).
Tier 1 Regulation A+
Tier 1 allows for sales of up to $20 million in any 12-month period.
State Interaction: It is important to note that Tier 1 does not preempt state law, thus due to the costs involved in obtaining State qualification the Tier 1 program is really only applicable for offerings that are limited to one but no more than a small handful of states.
Offering Circular: Submission of Form 1A via the EDGAR system for review, comments, and qualification
Financials: Tier 1 does not require the company to include audited financial statements and does not have any ongoing SEC reporting requirements. Note, most States will require audited financials so the Issuer should expect an audit requirement even though not required at the Federal level.
For offerings up to $20 million, an issuer can elect to file under either Tier 1 or Tier 2.
Tier 2 Regulation A+
Tier 2 allows for the sale of up to $50 million in a 12-month period.
State Interaction: Tier 2 preempts state blue sky law.
Offering Circular: A company may elect to either provide the disclosure using Form 1-A or the disclosure in a Form S-1. Note – for issuers that want to file a Form 8-A and register under the Exchange Act – the Form S-1 format is a precondition to that filing.
Financials: Tier 2 offerings require audited financials. For new special purpose entities (such as a newly formed LLC for a real estate fund) – only the issuers balance sheet would need to be audited.
Reporting – Tier 2 issuers are required to submit certain annual (Form 1-K) and semi-annual (Form 1-SA) reports. If the issuer has fewer than 300 shareholders of record, they may file to withdraw from these reporting requirements after the first annual report. If the company meets certain asset and number-of-shareholders tests (assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited), and has a public float of more than $75M (held by non-affiliates) or annual revenue greater than $50M annually, the company will enter a two-year transition period to begin complying with the reporting requirements of fully public companies.
Both Tier I and Tier 2 Regulation A+ offerings contain certain minimum basic requirements, including issuer eligibility provisions and disclosure requirements.
Regulation A+ is available to companies organized and operating in the United States and Canada. A company will be considered to have its “principal place of business” in the U.S. or Canada for purposes of determination of Regulation A+ eligibility if its officers, partners, or managers primarily direct, control and coordinate the company’s activities from the U.S. or Canada, even if the actual operations are located outside those countries.
The following issuers are NOT eligible for a Regulation A+ offering:
Companies who currently subject to the reporting requirements of the Exchange Act;
Investment companies registered or required to be registered under the Investment Company Act of 1940, including BDC’s. However, a company that operates investments that are exempt from the registration requirements under the 1940 Act would qualify, such as REIT’s and companies that transact in certain loans such as small business loans, student loans, auto loans, and personal loans.
Blank check companies, which are companies that have no specific business plan or purpose or whose business plan and purpose is to engage in a merger or acquisition with an unidentified target; however, shell companies are not prohibited, unless such shell company is also a blank check company. A shell company is a company that has no or nominal operations; and either no or nominal assets, assets consisting of cash and cash equivalents; or assets consisting of any amount of cash and cash equivalents and nominal other assets. Accordingly, a start-up business or minimally operating business may utilize Regulation A+;
Issuers seeking to offer and sell asset-backed securities or fractional undivided interests directly in oil, gas or other mineral rights (note Issuers in those industries can use Regulation A+ if they are selling an interest in an LLC or LP that engages in such activities);
Issuers that have been subject to any order of the SEC under Exchange Act Section 12(j) denying, suspending or revoking registration, entered within the past five years. Accordingly, a company that is deregistered for delinquent reporting would not be eligible for Regulation A+;
Issuers that became subject to Regulation A+ reporting requirements, such as through a Tier 2 offering, and did not file the required ongoing reports during the preceding two years; and
Issuers that are disqualified under the Rule 262 “bad actor” provisions.
Contact Regulation D Resources
Why Execute an Offering Under Regulation A+ - Important Aspects to Consider
Regulation A+ is a great fit for companies that want to publicly solicit investors but do not want to be limited to just accredited investors as in a Regulation D 506 (c) offering. Most issuers will execute under Tier 2 since it has the State level pre-emption as opposed to Tier 1 that is subject to State qualification.
There is additional cost involved in developing a Regulation A+ since the offering materials and offering must be reviewed and approved by the SEC – however the cost difference between an issuer using our Regulation D services and Investor Web Portal vs. the Regulation A+ service with included Investor Portal is approximately $23,000 (not inclusive of any potential costs for audited financials). For many clients this is a nominal cost difference to obtain the capability to accommodate ALL investors (accredited and non-accredited) and publicly solicit the investment opportunity and offering.
Further, the reporting requirement under Tier 2 is not onerous and the original Form 1A offering circular can be used as the basis for such filings with updates made to reflect the client company’s current operations and any material changes. If you have less than 300 shareholders – you can also opt out of the reporting requirement after your first annual Form 1-K filing.
Timing. Most Regulation A+ offerings will take 3-5 months to prepare the Form 1A circular, submit to the SEC, address SEC comments, and achieve qualification. For clients seeking to raise capital in a shorter period of time – but still avail themselves of the Regulation A+ program – we can execute a Regulation D offering initially as the Regulation A+ is being prepared and approved. Thus, the client can generally solicit the market via a Regulation D 506c offering, begin getting market exposure, and raise funding from accredited investors via the 506c as the Regulation A+ offering is being prepared. Once the Reg A+ is approved – the 506c is terminated and all new sales execute through the Reg A+. Should a client decide to use this strategy we can provide a discount on the preparation of the initial Regulation D offering services fee.
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