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INTRODUCTION

Understanding Regulation A


Regulation A (Reg A) is an exemption to the securities registration requirement found in the Securities Act of 1933. This allows qualifying companies to raise capital from the public without taking on the exorbitant costs and legal requirements needed for a traditional IPO.

As it was originally written, an offering was exempt under Reg A if:

  • The securities sold in a year value $5M or less
  • The issuer files an offering statement with the SEC
  • An offering memorandum is prepared for the potential security purchases
  • The issuer registers the offering in any state in which they plan to sell securities to satisfy blue sky laws

In 2017, there were over 100 Reg A filings totaling more than $250 million in transaction volume. This accounts for modest growth over 2016, where there were 81 filings for $190 million in transaction volume.

This page provides an in-depth look at Regulation A. For an even deeper dive, we've put together a this whitepaper.




What's the difference between Tier I and Tier II?


In 2015, the JOBS Act updated Reg A, creating two tiers of offerings:


  Tier I Tier II
Offering Size $20M annual limit (can include $6M by selling shareholders). $50M annual limit (can include $15M by selling shareholders).
State Registration Required to register with each state in which securities are sold, subject to local anti-fraud regulations as well as filing and fee requirements. Covered offering, exempt from blue sky laws. Still subject to local anti-fraud regulations as well as filing and fee requirements.
Solicitation Public offering, can be marketed anywhere. Public offering, can be marketed anywhere.
Audited Financials Financial statements must be submitted when filing, but are not required to be independently audited. Financial statements must be audited in accordance with either the auditing standards of the American Institute of Certified Public Accountants or the standards of the Public Company Accounting Oversight Board.
Eligible Issuers U.S. and Canadian; no SEC-registered companies; no blank check companies; companies that have failed to make previous required filings excluded. U.S. and Canadian; no SEC-registered companies; no blank check companies; companies that have failed to make previous required filings excluded.
Eligible Investors All investors. All investors.


1

Reg A vs Other Capital Raise Options

A new way to go public

 

Reg A falls into a middle ground between private capital raise options like Reg D, and public options like an IPO, but presents its own unique benefits to issuers.

Reg A vs Reg D
The primary difference between Reg A and private offerings under Reg D is the eligibility of non-accredited investors. While 506(b) does allow for up to 35 non-accredited investors in an offering, it is forbidden to market those securities online to potential investors. 506(c), does not allow unaccredited investors, but can be marketed online via the “general solicitation” rule, bringing it more in line with Reg A. Reg A is marketable to all investors, regardless of channel. The major benefit of Reg D is the ability to raise capital without the $50 million limitation imposed by Reg A.

Reg A vs IPO

Though it is an exemption from federal registration requirements like private capital raise exemptions Reg D and CF, Reg A actually has more in common with a traditional IPO. Because it is open to all investors and because in some cases securities can even be resold or traded, Reg A offerings are considered public offerings.

A traditional IPO is designed for large companies with the capital needed to cover the legal and accounting costs associated with going public. Reg A opens up the door for smaller companies to do the same, including the ability to list Tier 2 offerings on securities exchanges like NASDAQ or NYSE or even OTC. For this reason, a Tier 2 offering is sometimes called a “Mini-IPO.”

Similar to an IPO, a Reg A offering can act as a liquidity event for earlier stage investors. This “secondary sales” process allows for up to 30 percent of the securities sold during a raise to come from current security holders. Unique aspects of a Reg A deal:

  • No required minimum capital raise goal (unless listing on NASDAQ or NYSE)
  • Shorter document preparation time
  • Lower legal and filing fees
  • Total issuer process can take up to 20 weeks
 
 
 

2

The Risks and Rewards 

Is Reg A something you should consider?

 

Potential Risks

Reg A opens new doors for companies seeking capital, but it is not without its drawbacks. While less expensive than a full blown IPO, a Reg A offering is still quite expensive with the accumulation of legal fees, annual accounting fees in order to comply with reporting regulations, broker-dealer fees, not to mention the cost of marketing the offering to the public. In addition, many Reg A offerings have not been successful in reaching their raise goals and even the ones that have, raised an average of only $16M. Despite the benefits, this is a risky proposition to incur relatively high costs.

To alleviate some of these risks, Reg A includes the ability to “test the waters,” which allows issuers to promote potential offerings to gauge investor interest before committing to a full Reg A raise. Issuers can test the market and investors can pre-subscribe. However, testing the waters can result in inflated expectations since investors who pledge ahead of time are not actually bound to that commitment and may drop out.

Companies with small raise budgets, immediate need for capital, lack of established investor interest, or companies that have not considered how they will process investors should think twice before engaging in a Reg A raise.

Potential Rewards

Filing a Reg A offering is not for the faint-of-heart. But, when conducted smartly and compliantly, the rewards can be great. Commonalities between successful raises seem to be a focus on consumer products and services, rather than B2B, and either high investment interest prior to the offering or a strong marketing strategy to drum up support.

Companies that wish to “go public” and list on an exchange, retail companies with passionate fans, and companies with previous capital raise success are well suited for a Reg A raise.

 

3

Filing Requirements

Start your raise compliantly

 

As with Regulation D, the SEC requires that all Reg A offerings are filed electronically on the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) database. Issuers must then submit an offering statement in the form of Form 1-A, which contains issuer information, recent financial statements, an Offering Circular (Reg A’s version of a private placement memorandum) and any relevant exhibits.

Tier 2 issuers must not only include the required financial statements, but also must have them independently audited in accordance with the standards of the Public Company Accounting Oversight Board. Tier 1 issuers are exempt from these requirements, but must clearly demarcate any unaudited statements.

Additionally, Tier 2 issuers are subject to ongoing SEC reporting requirements: Form 1-K for audited annual reports, Form 1-SA for semiannual reports, which are not required to be audited, and notice filings with the states into which they sell.

4

Do you need a BD for Reg A?

The broker registration rule applies

 

As with any capital raise, conducting a Reg A offering without a broker-dealer is a risky move. A broker-dealer specializing in Reg A will have expertise gained from reviewing dozens or even hundreds of Reg A offering documents and structures. Having a broker-dealer managing the offering provides an additional review for potential issues with both federal and state securities laws. Some broker-dealers even offer technology solutions that can be essential in handling the high volume of investments that comes with public access and low offering minimums.

5

What is an Investomer?

Capitalize upon your loyal fan base


Some Reg A issuers, particularly those in retail markets, pursue a strategy of attracting current customers into becoming investors. An investor who is also a customer is called an “investomer.” These companies are able to cultivate a community of followers so loyal that they want to own a piece of the brand for themselves. Some incentives that benefit an investomer strategy are low investment minimums and exclusive discounts. For some companies, an investomer strategy may even work in reverse, attracting new investors that become loyal customers.

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