The New Regulation A: Effective June 19, 2015
As the amended Regulation A (or Regulation A+ as it is often referred to) launches, many companies are enthusiastically wondering whether this powerful vehicle for raising funds could be right for them. Often described as a mini public offering, securities offered under Regulation A are exempt from registration under the Securities Act, as amended, and such offerings are governed by a specific set of rules.
The new Regulation A is broken down into two tiers. Tier 1 allows for a company to raise up to $20 million in a twelve month period, while companies may raise up to $50 million during that same period under Tier 2 (companies could only raise $5 million under the prior Regulation A). But whether either tier of Regulation A will serve your company well will depend on many factors other than the size of the raise. The final rules are here, but immediately below are some of the key distinctions between the two tiers.
- Raise up to $20 million in twelve months (up to $6 million of which may be sold by selling securityholders)
- Audited financials are not required under the federal rules (unless already prepared), but in many cases they will still be required because of applicable state law
- Ongoing reporting is not required
- Subject to the overall offering limit, there is no limit as to how much a person may invest, regardless of whether that person is accredited
- State law is not preempted, but many states have become part of a coordinated review process.
- May raise up to $50 million in twelve months (up to $15 million of which may be sold by selling securityholders)
- Audited financials are required
- Annual and Semiannual reports, and other reports if certain events occur, are required
- Subject to the overall offering limit, there is no limit on how much an individual who is accredited may invest, but a non accredited investor is limited to: (a) 10% of the greater of annual income or net worth (for natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year end (for non-natural persons)
- Registration and qualification under state securities law is generally preempted (though states may still require notice filings)
The above is only a limited overview of the distinctions between the tiers, and there are various caveats even with regard to those (e.g., it is possible in certain circumstances for an issuer under Tier 2 to exit from its ongoing reporting requirements under Regulation A).
Under either tier, the SEC has allowed for “testing the waters” – that is, issuers may solicit potential investors before (and after) an offering statement is filed with the SEC, as long as certain requirements are complied with. Issuers should note, however, that because the SEC did not include any preemption of state law under Tier 1, they must carefully consider any applicable state law.
After an issuer files its offering statement with the SEC, the offering must be qualified before sales are actually completed. Both tiers allow for secondary sales with certain limitations (and distinctions between affiliate and non-affiliate securityholders). These requirements and others all require careful attention and accompanying compliance costs, but there are also enormous potential benefits.
Is Regulation A right for your company? Immix can help guide you through the critical considerations in answering that question.
About the Author: Patrick De Klotz
Email: firstname.lastname@example.org | Direct: (503) 802-5535
As a business attorney in Portland, Patrick assists clients by advising them on regulatory compliance, FOIA issues, intellectual property issues, and other general business needs.