Going Public – Regulation A+ – IPO Alternative
Regulation A+ is designed to facilitate smaller companies’ access to capital by providing an alternative to direct public offerings/DPO’s and initial public offerings/IPO’s. Regulation A+’s new rules provide investors with more investment choices and issuers with more capital raising options during their going public transactions. Regulation A+ provides a workable alternative to an initial public offering/IPO by allowing companies to raise capital without an underwriter and without filing a full blow S-1 registration statement with the SEC.
Regulation A+ expands existing Regulation A. Existing Regulation A provides an existing exemption from registration for smaller issuers of securities. Regulation A+ offerings can be used in combination with direct public offerings and initial public offerings as part of a Going Public Transaction. The exemption simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital.
As adopted Regulation A+ provides for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with no more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with no more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
The exemption is limited to companies organized in and with their principal place of business in the United States or Canada. The exemption would not be available to companies that:
- Are already SEC reporting companies and certain investment companies;
- Have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company;
- Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights;
- Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years;
- Have not filed ongoing reports required by the rules during the preceding two years; and
- Are disqualified under the “bad actor” disqualification rules.
Blue Sky Laws
Regulation A+ provides for the preemption of state securities law registration statement requirements and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).
Bad Actor Ban
Like Rule 506(c) of Regulation D, an issuer must comply with the technical requirements of Regulation A+ in order to avail itself to the exemption, including bans on certain “bad actors” As such, issuers should engage qualified securities counsel prior to undertaking a Regulation A + offering to ensure all requirements are complied with.
Other Tier 2 Requirements
In addition to the basic requirements of Regulation A+, companies conducting Tier 2 offerings are subject to other requirements, including:
- A requirement to provide audited financial statements.
- A requirement to file annual, semiannual, and current event reports.
- A limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth.
The rules exempt securities in a Tier 2 offering from the mandatory registration requirements of Exchange Act Section 12(g) if the issuer meets all of the following conditions:
- Engages services from a transfer agent registered with the Commission.
- Remains subject to a Tier 2 reporting obligation.
- Is current in its annual and semiannual reporting at the fiscal year-end.
- Has a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.
An issuer that exceeds the dollar and Section 12(g) registration thresholds would have a two-year transition period before it must register its class of securities, provided it timely files all of its ongoing reports required under Regulation A.
Comparison of Regulation A+, Rule 506 and Form S-1.
The table below provides a comparison of securities offerings made pursuant to the exemptions provided by Regulation A+, Rule 506(b) and Rule 506(c) and offerings registered on Form S-1.
|Regulation A+||Rule 506(b)||Accredited Crowdfunding-Rule 506(c)||Form S-1/DPO-IPO|
That Can be Raised
|Tier 1: $20 million each 12-month period.
Tier 2: $50 million each 12-month period.
|No maximum offering amount.||No maximum offering amount.||No maximum offering amount..|
|Resales Sales by Existing Shareholders||Tier 1: Affiliates may sell up to $6 million.
Tier 2: Affiliates may sell up to $15 million.
Tier 1 and Tier 2: All Shareholders (Affiliates and non-affiliates) in an initial and any subsequent Regulation A+ offering within 12 months are limited to 30 percent of the aggregate offering price.
|Shareholders may not sell securities in the offering.||Shareholders may not sell securities in the offering.||Shareholders may sell securities in the offering.|
|Eligible Issuers||U.S. and Canadian companies that are not: (i) an SEC reporting company, an investment company, a blank check company, an issuer of fractional undivided interests in oil or gas rights, an issuer required to file but delinquent in filing ongoing reports under Regulation A+ during the two years immediately preceding the filing of a new Regulation A offering statement, an issuer that has had its registration revoked under Exchange Act Section 12(j) or a “bad actor” under Regulation A+.||Any company, provided that it complies with the “bad actor” requirements of Rule 506(d) of Regulation D.||Any company, provided that it complies with the “bad actor” requirements of Rule 506(d) of Regulation D.||Any company can use Form S-1 to register securities.|
|Permitted Investors||Tier 1: Anyone.
Tier 2: If listed on a national securities exchange there are no offering limitations. For non-exchange listed issuers, non-accredited investors can purchase up to: (i) 10 percent of the greater of the investor’s revenue or net assets, if not a natural person; or (ii) 10 percent of the greater of the investor’s annual income or net worth, if a natural person. These investment limitations do not apply if the offered securities will be listed on a national securities exchange.
|Up to 35 non-accredited investors and unlimited accredited investors.||Only accredited investors may invest.||No requirement that investors be accredited. Anyone can invest.|
|General Solicitation and Advertising||Tier 1 and Tier 2: No limitations on general solicitation and advertising. The issuer may also “test the waters” before and after its offering statement is filed with the SEC.||General solicitation and advertising not permitted.||No limitations on general solicitation and advertising.||General solicitation and advertising allowed so long as the issuer meets all applicable requirements of the Securities Act.|
|Ongoing Reporting Requirements||Tier 1: No ongoing reporting requirements, unless the company exceeds the registration threshold under Section 12(g) of the Exchange Act.
Tier 2: Issuer must file with the SEC annual reports on Form 1-K (with audited financial statements), semi-annual reports on Form 1-SA and current reports on Form 1-U.
|No ongoing reporting requirements unless the company exceeds the registration threshold under Section 12(g) of the Exchange Act.||No ongoing reporting requirements unless the company exceeds the registration threshold under Section 12(g) of the Exchange Act.||Upon effectiveness of the Form S-1, the company is subject to the periodic and current reporting requirements of the Securities Exchange Act.|
|Limitations on Resales||Tier 1 and Tier 2: Securities sold are not “restricted securities” and are not subject to the resale restrictions of Rule 144 of the Securities Act.||Securities sold are “restricted securities” and are subject to the transferability restrictions under Rule 144 of the Securities Act.||Securities sold are “restricted securities” and are subject to the transferability restrictions under Rule 144 of the Securities Act.||Securities sold are not “restricted securities” and are not subject to the transferability restrictions under Rule 144 of the Securities Act.|
|State Law Blue Sky Requirements||Tier 1: Issuers are subject to blue sky registration and qualification.
Tier 2: Blue sky laws are preempted.
|Blue sky laws are preempted.||Blue sky laws are preempted.||Blue sky laws do not apply if the securities offered are “covered securities” under Section 18 of the Securities Act.|
For further information about SEC periodic reports post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. 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 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.
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