Regulation A+ 2019 Q&A – Securities Lawyer 101
Regulation A provides an exemption from registration that can be used in combination with a Rule 506 private placement, a direct public offering and/or initial public offering by a private company or company seeking to go public. Since Regulation A was amended in 2015, it has gained notable market acceptance and has undergone a few changes. Regulation A has two offering tiers: Tier 1 and Tier 2. Tier 2 has evolved into a recognized method of Going Public particularly on the OTC Markets. Regulation A simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority (“FINRA”) while allowing the issuer to raise initial capital. This blog post addresses the most common questions we receive about Regulation A+.
How much can I raise with Regulation A+?
Tier 1 is available 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. Tier 2 is available 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.
What securities can I register on Form 1-A pursuant to Regulation A+?
Regulation A can be used to register shares, warrants, and convertible equity securities.
Which Companies use Regulation A+?
Regulation A offerings can only be conducted by companies that are domiciled in and have their principal place of business in the United States or Canada. As such, foreign issuers may not conduct Regulation A+ offerings and must locate an alternative exemption for their unregistered offerings.
Can a Company that is subject to SEC Reporting Requirements conduct a Regulation A + offering?
As adopted, Regulation A only permits companies that are not subject to the SEC’s reporting requirements to offer securities pursuant to the exemption. In May 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which directed the SEC to amend Regulation A to allow SEC reporting requirements in order to conduct offerings under the exemption.
Does Regulation A allow shares held by Selling Shareholders to be included in the Form 1-A Offering Circular so that the shares can be resold like shares registered in a Form S-1 Registration Statement?
Selling Stockholders cannot resell their shares in a Regulation A offering as easily as they could in an S-1 Offering. With a Form S-1 Registration Statement, there is no limit on the amount of shares that Selling Stockholders can include in a Registration Statement. Unlike shares registered on Form S-1, shares included in a Regulation A+ Offering Circular is limited to no more than 30 percent of the aggregate offering price of a particular offering.
Can Selling Shareholders Sell their Shares at any market price like shares registered on Form S-1?
No shares registered on a Form S-1 Registration Statement may be sold into the market at the prevailing market price. The price that Form S-1 Selling Stockholders can resell their stock is not fixed and varies from time to time according to the market price of the stock they are reselling. Shares covered by a Regulation A+ Offering Circular must be sold at the same fixed price as the securities offered by the Company as set forth in the Regulation A Form 1-A Offering Statement. This makes Regulation A virtually worthless as a mechanism for Selling Stockholders as they cannot deposit their shares with a broker-dealer and sell them into the market at market price. This is one of the few areas where filing a Form S-1 Registration Statement is preferable to a Regulation A + filing.
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 a Company’s eligibility to conduct a Securities Offering in reliance upon Regulation A+?
Yes. The 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. Thus, the “principal place of business” test is based upon where management is located rather than where revenues are generated.
Can Non-Accredited investors invest in Tier 2 Regulation A+ Offerings?
Yes. Both accredited and non-accredited investors can participate in Regulation A offerings. If the Issuer of a Tier 2 Offering does not become listed on a national exchange, non-accredited investors may invest the greater of 10% of their income or net worth (exclusive of principal residence).
Are shares purchased in a Regulation A+ Offering free trading securities?
Shares sold in a Regulation A+ offering are free trading securities. As such, resales by non-affiliates are not subject to transfer restrictions. Resales by affiliates (other than registered resales or secondary sales under Regulation A+) are subject to the limitations of Rule 144, excluding the holding period requirement.
Are Companies subject to SEC Reporting Requirements after their Regulation A+ Offering is approved?
Yes. You must file reports specifically designed for Regulation A+. Issuers conducting Regulation A Tier 1 offerings must file a Form 1-Z within 30 days after the offering is complete or terminated. Form 1-A requires information about the amount of securities qualified and sold, as well as the price, fees, and net proceeds.
Issuers conducting Regulation A Tier 2 offerings must report the same information on Form 1-Z or, depending on when the offering is terminated, in their annual report on Form 1-K. Issuers in Regulation A Tier 2 offerings become subject to ongoing SEC reporting obligations.
What is a Form 1-A Offering Statement?
The Regulation A+ Form 1–A offering statement has three parts. Part 1 requires basic issuer information such as the details about the security being offered, the jurisdictions where the securities will be offered, and the recent sales of unregistered securities. Part 2 requires business, management, financial statements, and other substantive disclosures. Part 3 contains exhibits and related documents.
Are Regulation A+ filings available on the SEC’s EDGAR database?
Yes. All Regulation A+ filings must be made through the SEC’s electronic filings system, known as EDGAR.
What SEC Periodic Reporting Requirements are imposed on Tier 2 issuers?
Tier 2 issuers becomes subject to Regulation A SEC Reporting requirements if certain conditions are met. These include: (i) that the securities of each class covered by the Form 1- A Offering Statement be held of record by less than 300 persons (1,200 persons for banks and bank holding companies); (ii) offers and sales under the Form 1-A offering statement are not ongoing; and (iii) the issuer has complied with its ongoing reporting obligations.
What are the ongoing SEC Reporting Requirements for Tier 2 issuers?
The ongoing requirements for Tier 2 issuers include: (i) annual reports on new Form 1-K, which includes the same information required in a Form 1-A and Regulation A offering circular, other than the offering-specific information; (ii) semi-annual reports on new Form 1-SA which include financial statements and an MD&A; (iii) current information reports on the new Form 1-U which reports “fundamental changes,” and other specific events including bankruptcy or receivership, non-reliance on previously issued financial statements, audit reports or interim reviews, changes in control, departure of certain executive officers, and unregistered sales of 10% or more of outstanding equity securities; and (iv) depending on the financial statements included in the Form 1-A and the timing until the next annual or semi-annual report, financial reports on new Forms 1-K and 1-SA are required for periods where there are gaps in the financial information.
Do Regulation A Tier 2 offerings satisfy the OTC Markets OTCQB ongoing disclosure requirements?
Yes. The OTC Markets have stated that Tier 2 ongoing SEC disclosure requirements satisfy the OTCQB continuing disclosure requirements.
Do the Financial Statements in Regulation A+ Offerings have to be audited?
For Tier 1 Regulation A+ offerings, the issuer’s financial statements do not have to be audited. For Tier 2 offerings, Audited Annual Financial Statements must be provided by the Company’s independent auditor. An auditor does not have to registered with the Public Company Accounting Oversight Board to audit financial statements in a Regulation A+ offering.
What periods of a Company’s financial statements are required to be audited in a Regulation A+ Offering?
Financial statements must be dated not more than nine months before the date of Regulation A+ filing or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Can Regulation A be relied upon by an issuer for business combination transactions, such as a merger or acquisition?
Yes. Regulation A+ may be relied upon for business combination transactions, but, as the SEC has indicated, Regulation A+ would not be available for business acquisition shelf transactions that are typically conducted on a delayed basis.
May a recently created entity conducting a Regulation A Offering choose to provide a balance sheet as of its inception date?
Yes. As long as the inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity has reached its first annual balance sheet date. The date of the most recent balance sheet determines which fiscal years or period since existence for recently created entities, the statements of comprehensive income, cash flows and changes in stockholders’ equity must cover. If the balance sheet is dated as of inception, then the statements of comprehensive income, cash flows, and changes in stockholders’ equity will not be applicable.
Are Issuers conducting Regulation A+ Tier 2 Offerings exempt from Section 12(g) SEC Reporting Requirements?
Securities issued in a Tier 2 offering are exempt from the Exchange Act reporting requirements of Section 12(g) if and for so long as the issuer remains subject to, and is current in (as of its fiscal year end) its Regulation A periodic reporting obligations, provided the following additional conditions are also met:
- Issuer has engaged a transfer agent that is appropriately registered with the SEC; and
- Issuer has a public float of less than $75 million (or, in the absence of a public float, annual revenues of less than $50 million) (similar to the “smaller reporting company” qualifications)
Can a Company conducting a Regulation A Tier 2 Offering become a subject to SEC Reporting under the Exchange Act by filing a Registration Statement on Form 8-A instead of Form 10?
Can a Company suspend its Regulation A+ SEC Reporting Requirements?
Yes. A company can suspend its ongoing SEC Reporting Requirements after the fiscal year in which its Form 1-A offering statement is qualified if it has filed an annual report for that fiscal year using Form 1-Z.
Is a Company that was previously required to file reports with the SEC under Section 15(d) of the Exchange Act, but that has since suspended its SEC Reporting Requirements, an eligible issuer under Rule 251(b)(2) of Regulation A?
Yes. A company that has suspended its Exchange Act reporting obligation by satisfying the statutory provisions for suspension in Section 15(d) of the Exchange Act or the requirements of Exchange Act Rule 12h-3 is not considered to be subject to Section 13 or 15(d) of the Exchange Act for purposes of Rule 251(b)(2) of Regulation A.
Is an issuer qualifying an offering statement pursuant to Regulation A required to file a tax opinion as an exhibit to its Form 1-A?
No. Although not required, an issuer may elect to file additional exhibits, including a tax opinion, pursuant to paragraph 15(b) of Item 17 of Part III to Form 1-A.
Will the SEC object if an issuer with an ongoing Regulation A reporting obligation not include an auditor’s consent to the use of an audit report for the financial statements included in a Form 1-K (Annual Report) as an exhibit to the Form 1-K?
No. Additionally, the auditor in a Regulation A Offering does not have to be registered with the Public Company Accounting Oversight Board (“PCAOB”).
Will a Regulation A+ Offering be integrated with other offerings?
- registered pursuant to Securities Act, unless the abandoned Regulation A offering provisions are applicable conducted pursuant to Rule 701;
- conducted pursuant to employee benefit plans;
- conducted pursuant to Regulation S;
- conducted pursuant to Regulation Crowdfunding; or
- conducted more than six months after the completion of the Regulation A offering.
Are Bad Actors banned from Regulation A+ Offerings?
Yes. Regulation A+ includes bad actor disqualification provisions as adopted under Rule 506(d) of Regulation D. Regulation A+ added two additional disqualification triggers. These are SEC cease-and-desist orders for violations of scienter-based anti-fraud provisions of the federal securities laws or the registration provisions of Section 5 of the Securities Act and the final orders and bars of certain state and other federal regulators.
Do I need a Broker-Dealer for my Regulation A+ offering?
No. Broker-Dealers are not required for a Regulation A offerings. Issuers can raise capital without the services of a broker-dealer.
What State Blue Sky Laws apply to Regulation A+ Offerings?
Securities offered under Tier 2 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 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 is compliant with the blue sky filing requirements of the participating states. Note that in Regulation A Tier 2 A Offerings, the individual States may still require a copy of the Form D and filing fees.
Do the SEC’s anti-fraud provisions apply in Regulation A Offerings?
Yes. All securities transactions, including exempt transactions, are subject to the anti-fraud provisions of the federal securities laws. This means that the issuer and its management will be responsible for false or misleading statements regarding your company, the securities offered, or the offering. In any securities offering, the Company and its management are responsible for any such statements, whether made by the company or on behalf of the company, regardless of whether they are made orally or in writing. As such, all investor disclosures prepared in Regulation A offerings must be true, complete, and should be approved by a competent securities lawyer.
For further information and answers to your questions about Regulation A +, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, Florida, (561) 416-8956, or [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton &Associates Law Group, P.A. 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.