What is Regulation A?

Regulation A, sometimes referred to as the “mini IPO,” is a way to raise money for your company by offering securities — debt or equity — to the public without having to register the securities with the Securities and Exchange Commission. You still must qualify the securities with the SEC, but the work involved is less rigorous and expensive than with a regular IPO. Raising money in a Regulation A securities offering may be useful for smaller, early-stage companies that do not have enough property to pledge to obtain a bank loan.

When is Regulation A Available?

Regulation A is only available to companies organized and operating in the United States and Canada. Investment companies and “blank check” companies, among others, are not able to use Regulation A. Regulation A is not available to a company if the company, an affiliate, or the underwriter is subject to a criminal conviction, an administrative order or an injunction or bar involving certain securities law violations, or if any of the company’s directors, officers, general partners, 10 percent owners or promoters, or the underwriter’s partners, directors, or officers, are subject to the same conviction, order, injunction or bar. Note that most Regulation A offerings do not use an underwriter.

What’s the Difference Between Tier 1 and Tier 2?Regulation A is divided into two tiers of securities offerings. Tier 1 is limited to securities offerings that do not exceed $20 million in total in a twelve-month period. Tier 2 is limited to securities offerings that do not exceed $75 million in total in a twelve-month period. An issuer conducting an offering of $20 million or less may decide to proceed under either Tier 1 or Tier 2. As discussed below, a company may decide to use Tier 2 for a securities offering under $20 million if they are conducting an offering in multiple states or are using the internet to ask for offers nationwide.

In addition to United States federal securities laws, each state has its own securities laws referred to as “blue sky” laws. Unless federal securities law preempts the state blue sky laws, every securities offering must comply with both the federal and state laws, which if many states are involved can be an expensive and time-consuming endeavor. Tier 1 offerings are subject to registration or qualification under state blue sky laws. Because Tier 1 offerings do not preempt state blue sky laws, they are useful for offerings in only one or a couple of states. Tier 2 offerings are exempt from registration or qualification under state blue sky laws and are most often used by companies if the offering is being conducted nationwide or over the internet in three or more states.

Even though Tier 2 offerings are exempt from registration or qualification under state blue sky laws, states still have the authority to bring enforcement actions for fraud, require filing information about the offering with the state, and collect fees from the company. Massachusetts collects a variable fee of 1/20^th of 1% of the amount offered in Massachusetts, with a minimum of $300 and a maximum of $1,500.

Tier 1 offerings do not require the company to provide audited financial statements and do not require the company to file any ongoing reports with the SEC. Tier 2 offerings require the company to include audited financial information in their offering documents and require the company to file semi-annual and annual reports with the SEC, with an additional requirement for interim current event updates. Tier 2 issuers are allowed to stop their ongoing reporting requirements if they have less than three hundred shareholders of record and have filed all required reports for their most recent two fiscal quarters.

What is the Purpose of Regulation A?

The purpose of Regulation A is to offer companies an alternative way to raise capital, and not as a way for start-up founders and early investors to cash out their investment. This means that sales by selling security holders that are affiliates of the issuing company may not exceed $6 million for Tier 1 offerings, or $22.5 million for Tier 2 offerings, in a twelve-month period.Investors that are not “accredited investors” are limited in the amount of securities they may buy in a Tier 2 offering. An investor who is not an accredited investor may purchase no more than 10% of the greater of their annual income or net worth. For most purposes, an accredited investor is an individual with a net worth or joint net worth with a spouse of at least $1 million, not including the value of a primary residence, or an individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those two years, and a reasonable expectation of the same income level in the current year.You are allowed to “test the waters” with potential investors in a Regulation A offering. This means you are allowed to determine the level of investor interest before you decide to bear the full cost of an offering. Before the securities are qualified with the SEC, you cannot solicit payment or accept payment for the securities or obtain a firm commitment to purchase securities.

After qualification of the offering with the SEC, you may market the securities more broadly than in a registered offering if you provide the qualified offering circular before or with the marketing material, including by way of a hyperlink. This is useful for conducting a Tier 2 offering on the internet.

The SEC staff in a report to the Commission determined that as of December 31, 2019, and since the 2015 amendments to Regulation A, $2.446 billion was raised by 183 companies in ongoing and closed offers, including $230 million in Tier 1 offerings and $2.216 billion in Tier 2 offerings. The average amount raised was $13.4 million.

Disclaimer: This blog post discusses general legal issues and developments. It is for informational purposes only and may not reflect the most current law and should not be taken as legal advice on any set of facts or circumstances. No reader should act or refrain from acting based on any information presented in this blog post without seeking the advice of counsel. Weiffenbach Law Offices PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this blog post.