Who Is Eligible for Regulation A + Offerings? Posted by Brenda Hamilton, Securities Lawyer
A correctly designed Regulation A Offering Program can minimize your financial risk and significantly enhance your ability to raise money, but not how you may think. Both issuers and selling shareholders can benefit from Regulation A+. A few of the many benefits of Regulation A+ include:
- You can aggressively advertise your Regulation A+ Offering over social media and elsewhere in all 50 states BEFORE you spend any money to prepare and file a Form 1-A. As a side note, you may want to consider a small Crowdfunding Regulation CF offering to start as that will tell you accurately whether potential investors will actually buy your stock at the price you set, which you cannot do under A+
- You do not have to register your A+ Offering by making separate state “Blue Sky” filings, meaning you are free to advertise sell your A+ Offering in all 50 states, even in states that have “merit review.” An S-1 offering, on the other hand, requires separate registrations in every state, making it practically impossible to sell. Think how well this A+ Offering structure works if you want to sell stock from your website not only to potential investors but also to your customers and visitors to your website!
- Both Issuers and Selling Shareholders can rely on Regulation A.
- All the securities you sell in your Regulation A+ Offering are fully non-restricted free-trading.
- You can sell to both Accredited and Non-Accredited Investors without securing independent verification of investor financial status just like an S-1 Offering. For Non-Accredited Investors, there’s a 10% income/net worth limitation.
- With A+, you only have two on-going SEC filings per year.
- Although you have to do audits with an A+ Offering, you do not have to use an expensive PCAOB audit firm, but only a competent CPA firm. On-going SEC reporting does not require PCAOB audit firms after going public.
- With A+, you are not subject to the Proxy Rules and your Stockholders are not subject to Ownership Reporting Rules.
- Even with these reduced on-going reporting requirements you can secure a qualification for quotation of your securities on OTC Market’s OTCQB, just like with a Form S-1 registration statement.
Offering Types and Size Limitations in Regulation A+ Offerings
The SEC adopted final rules to implement the JOBS Act mandate by expanding Regulation A+ into two tiers:
- Tier 1 for securities offerings of up to $20 million aggregate in any 12 month period
- Tier 2 for offerings of up to $50 million aggregate in any 12 month period
You can make a Tier 2 offering of less than $20 million, but you are subject to the Tier 2 requirements described below.
Regulation A+ is limited to companies organized in and with their principal place of business in the United States or Canada.
Shell companies, Issuers of penny stock, or other types of investment vehicles such as REITS that meet the principal place of business test are also eligible to use Regulation A+.
What does “principal place of business in the United States or Canada” mean? The SEC has now issued a clarification, as follows:
Question: Would a company with headquarters that are located within the United States or Canada, but whose business primarily involves managing operations that are located outside those countries be considered to have its “principal place of business” within the United States or Canada for purposes of determining issuer eligibility under Regulation A?
Answer: Yes, an issuer will be considered to have its “principal place of business” in the United States or Canada for purposes of determining issuer eligibility under Rule 251(b) of Regulation A if its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the United States or Canada. [June 23, 2015]
So the test is based upon where management is located rather than where revenues are generated.
Regulation A+ is unavailable to the following types of Ineligible Issuers:
- Companies subject to the ongoing reporting requirements of Section 13 or 15(d) of the Exchange Act;
- Companies registered or required to be registered under the Investment Company Act of 1940 and Business Development Companies;
- Blank check companies;
- Issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights;
- Issuers that are required to, but have not filed with the Commission the ongoing reports required by the rules under Regulation A+ during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the Issuer was required to file such reports);
- Issuers that are or have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement; and
- Issuers subject to “bad actor” disqualification in the Rule.
Eligible and Ineligible Securities
Only certain types of securities are eligible for sale under Regulation A+, specifically common stock and preferred stock as well as warrants and other convertible equity securities and non-asset backed Notes, i.e. straight debt. You can offer Derivatives – Options, Warrants and Convertible Debt, with special rules for calculating offering amount if exercisable within one year or qualified in an offering.
Asset-backed securities, as defined in Regulation A+, are not eligible for sale under Regulation A+. See list of Ineligible Issuers above.
Stockholders Registering their Shares for Resale in a Regulation A+ Offering
One of the more prominent changes in A+ and S-1 is how stockholders registering their shares for resale, by having them included in a registration statement, can sell their securities if they are included in an S-1 Registration Statement vs. a Regulation A+ Offering Statement.
Who is a Selling Stockholder? A Selling Stockholder is not someone who purchases Company shares in an S-1 or Regulation A+ Offering. A Selling Stockholder means someone who owns restricted stock prior to the filing of an S-1 Registration Statement or Regulation A+ Offering Circular who wants to make their shares free trading by including their shares for resale in the SEC filing, along with the shares the Company is selling directly in such offering.
Selling Stockholders in a Regulation A+ Offering are subject to more restrictions than Selling Stockholders in an S-1 Registration Statement, as described below.
Number of Shares That Can Be Sold
- S-1: There is no limit on the amount of shares that Selling Stockholders can include in a Registration Statement
- A+: The amount of securities that Selling Stockholders can sell at the time of an Issuer’s first Regulation A+ offering and within the following 12 months is limited to no more than 30% of the aggregate offering price of a particular offering.
- Meaning: Selling Stockholders cannot resell as many shares in an A+ offering as they could in an S-1 offering.
Price at which Selling Stockholders Can Sell their Stock
- S-1: The shares may be sold into the market at market price. The price that Selling Stockholders can resell their stock is not fixed but varies from time-to-time according to the market price of the stock they are reselling.
- A+: The same as S-1. The primary difference is the limitation to 30% of the offering amount in A+ with no such limit in S-1.
Investment Limitations in Tier 2
Non-accredited investors in a Tier 2 offering can purchase no more than 10% of the greater of their annual income or their net worth. Annual income and net worth are calculated as provided in the accredited investor definition under Rule 501 of Regulation D.
The investment limitations for purchasers in Tier 2 offerings will not apply to purchasers who qualify as accredited investors under Rule 501 of Regulation D.
Unlike Regulation D Rule 506(c), Regulation A+ Issuers may rely on a representation of compliance with the investment limitation from the investor (Accredited and Non-Accredited) unless the Issuer knew at the time of sale that any such representation was untrue.
For more information about how Regulation A+ can work for you please contact a Securities Attorney at 101 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.