Regulation A+ and Secondary Trading 2018

The Securities & Exchange Commission’s amendments to Regulation A went into effect on June 19, 2015 and are now over three years old. The amendments known as Regulation A+ continue to gain market acceptance not only by the OTC Markets but also by the New York Stock Exchange and NASDAQ Stock Market as an effective means of going public. A sometimes overlooked aspect of Regulation A+ is the impact of blue sky laws on secondary trading and liquidity.

The Securities & Exchange Commission’s amendments to Regulation A known as Regulation A+ went into effect on June 19, 2015.  Regulation A+ has gained market acceptance not only by issuers quoted on the OTC Markets but also by the New York Stock Exchange (“NYSE”) and NASDAQ Stock Market as an effective means of raising capital and going public.

A sometimes overlooked aspect of Regulation A+ is the impact of Blue Sky laws on secondary trading and liquidity. State Blue Sky laws are applicable to secondary trading and vary from state to state. From a practical perspective, it is important for a company looking to raise capital to offer liquidity to investors and facilitate secondary trading.

The trading of securities of issuers listed on National Securities Exchanges like the NASDAQ Stock Market and the NYSE are exempt from State Blue Sky laws that govern secondary trading; however, other companies such as those on the OTC Markets platform must comply with State Blue Sky laws for both their Regulation A+ Offerings and secondary sales.

Regulation A+ Tiers – Offering Exemptions & Blue Sky Compliance

Regulation A+ includes two offering  tiers with different characteristics and requirements. Each Regulation A+ tier is treated differently under State Blue Sky laws.

Tier 1 of Regulation A+ provides an exemption for securities offerings of up to $20 million in a 12-month period while Tier 2  provides an exemption for securities offerings of up to $50 million in a 12-month period. It should be noted that an issuer offering $20 million or less of securities can elect to proceed under either Tier 1 or Tier 2 of Regulation A+.

Securities offered under Regulation A+ Tier II are “covered securities” under the National Securities Markets Improvement Act of 1996  (“NSMIA”) and are exempt from state registration and qualification requirements. Issuers conducting Regulation A+ Tier I offerings must comply with the individual laws of each state where the Company plans to offer and sell its securities.

Companies conducting Regulation A+ Tier I offerings may use the North American Securities Administrators Association (“NASAA”)  coordinated review program which is operational and effective in 46 states. Under the NASAA coordinated review program, Tier I issuers may email their Regulation A offering materials to the administrator of the review program. Upon approval, the Tier 1 offering will be compliant with the State Blue Sky filing requirements of the participating states.

Note that in Regulation A Tier II A Offerings, the individual States may still require a copy of the Form D and filing fees

Regulation A+ Resales Under Tier 1 & Tier 2

Regulation A+ treats resales by affiliates and non-affiliates differently. Under Regulation A+, secondary sales by Affiliates of the issuer cannot account for more than 30% of the total dollar amount of the Regulation A+ offering being qualified. After the expiration of the first year, secondary sales by non-affiliates are permitted up to the maximum offering amount allowed by either Tier I or Tier II of Regulation A+.

Secondary Trading

Even though an issuer may be in compliance with State Blue Sky requirements applicable to its Regulation A+ Offering, the issuer must comply with state laws that regulate  secondary trading so that the Regulation A+ investors are able to sell their shares. State Blue Sky compliance becomes more complicated for issuers conducting both Tier I and Tier II offerings after securities are issued and shareholders seek to sell of their shares.

Manual Exemption for Secondary Trading

Currently, 38 states recognize the Manual Exemption for secondary trading of securities sold in Regulation A+ Offerings. To avail oneself to the exemption, the issuer and the security must be listed in a securities manual recognized by the specific state. The securities manual must include: the names of the issuer and its officers and directors, the issuer’s balance sheet; and a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations.

Unsolicited Brokerage Transactions

Investors  in Regulation A+ Offerings may also rely on the exemption for unsolicited brokerage transactions which exempts a non-issuer transaction by or through a broker-dealer effecting an unsolicited order or offer to purchase.  The Unsolicited Brokerage Transaction exemption is not available for an unsolicited transaction by or through the issuer directly.

Issuers conducting Regulation A Offerings should consider the following factors impacting liquidity and resales:

  • For a Tier 1 Regulation A Offering, secondary sales are limited to $6 million in a 1 month period.
  • For a Tier 2 Regulation A Offering, secondary sales at the time of the Regulation A offering and 12 months thereafter cannot exceed 30 percent of the aggregate offering price of the offering.
  • Shares sold in a Regulation A + Offering are freely tradable by non-affiliates after the offering is qualified by the SEC.
  • The Company’s sponsoring market maker may immediately file a Form 211 with FINRA to initiate quotation of the Company’s shares upon qualification by the SEC of the Regulation A+ offering.
  • OTC Markets OTCQX and OTCQB eligibility are dependent on the Form 211 price.
  • Upon clearance of the Form 211 by FINRA, the sponsoring market maker will quote the issuer’s shares for first 30 days.
  • State Blue Sky laws relating to secondary trading are applicable to secondary trading of securities sold in Regulation A Offerings & issuers should ensure an exemption is available.

For more information about going public and Regulation A+, securities law, going public, or our other legal services please contact Hamilton & Associates Law Group, P.A. 01 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956 or by email at [email protected]   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.