Regulation A Investor Bulletin Issued by SEC

Regulation A Offering Exemption
Regulation A Not Giving Warm Fuzzies to the SEC

In April of this year, NASDAQ submitted a proposal related to the Regulation A Offering Exemption which would require any Company listing on NASDAQ in connection with an offering under Tier 2 of Regulation A of the amended Securities Act of 1933, (the “Securities Act”), to have a minimum operating history of two years at the time of approval of its initial listing application.

The proposal came after the SEC expressed concerns about issuers with less developed business plans unlike other companies seeking to list on the NASDAQ. The SEC expressed concern that investors may be exposed to greater risks of fraud from companies using Regulation A. In response to these concerns, the NASDAQ proposed the seasoning requirement for Regulation A issuers. On June 28, 2019, the SEC approved changes to NASDAQ Listing Rule 5210, imposing listing requirements for companies conducting offerings under Regulation A of the Securities Act. The amendment will take effect on July 28, 2019.

On May 24, 2019, the SEC’s Office of Investor Education and Advocacy issued an Investor Bulletin to educate investors about the Regulation A exemption.  Regulation A provides an exemption from SEC registration under the Securities Act of 1933, as amended, that allows companies to raise money from the public in securities offerings of up to $50 million. The release is summarized below.

What is a Regulation A Offering?

A Regulation A Offering allows a company to offer and sell up to $50 million of securities to the public, but with more limited disclosure requirements than what is required for SEC reporting companies.  In comparison to registered offerings on Form S-1, smaller companies in earlier stages of development may be able to use this rule to raise money more cost-effectively.

How does Regulation A affect investors?

A Regulation A Offering provides an opportunity for investors to purchase securities at an early stage and in smaller companies and businesses.  Before investing, investors should be fully aware that any Regulation A Offering involves risks.  Investors should consider that investments in startups and early-stage ventures even those conducting a Regulation A Offering are speculative and those businesses may fail.  Unlike an investment in a mature business where there is a track record of revenue and income, a startup often relies on the development of a new business, product, or service that may or may not find a market.  Additionally, even though there is no resale restriction in a Regulation A Offering, investors may need to hold the investment for an indefinite period of time.  If the securities sold in the Regulation A Offering are not listed and there are no plans for the securities to be listed on an exchange where investors can quickly and easily trade the securities, then investors should be prepared to hold the investment indefinitely.

What do Investors need to know about Regulation A Offerings?

All investors in a Regulation A Offering must be provided with, or given information to access, an Offering Circular on Form 1-A.  The Offering Circular will contain important information such as information about the offering and the securities offered, risks of the investment, use of proceeds, any selling shareholders, and the company’s business, management, performance, plans, and financial statements. 

Because a Regulation A Offering may include shares held by existing shareholders who invested in the Company, the proceeds from from the offering may not be used to fund the operations of the Company. Companies are required to indicate the tier under which the offering is being conducted on the cover of the Regulation A Form 1-A Offering Circular. 

Tier 1

Under Tier 1 Regulation A Offering, a company can raise up to $20 million in any 12-month period.  For Tier 1 offerings, the Offering Circular must be filed with, and is generally subject to review and qualification by the SEC, as well as the securities regulator in the states where the offering is being conducted.  The financial statements disclosed in a Tier 1 offering do not have to be audited. 

For both tiers under Regulation A, a company can only accept payment for the sale of its securities once its offering materials have been qualified by the SEC.  Additionally, companies that are conducting a Tier 1 offering must generally have their offering materials qualified by state securities regulators in the states in which the company plans to sell its securities.

It is important to know whether a Regulation A Offering has been qualified. However, investors should understand that the SEC’s qualification of an offering statement does not mean that the SEC has assessed or approved the accuracy of the offering statement or the merits of the securities offered.

Tier 2

Under Tier 2 of Regulation A, a company can offer up to $50 million in any 12-month period.  For Tier 2 offerings, the Offering Circular is subject to review and qualification by the SEC, but is not subject to review by state securities regulators.  Financial statements disclosed in a Tier 2 offering must be audited by an independent accountant but the accountant does not have to be registered with the Public Company Accounting Oversight Board. 

If not already listed, securities offered under Tier 2 may be listed on a national securities exchange such as the New York Stock Exchange or Nasdaq on condition that the company applies for listing and meets the listing requirements for that particular exchange.  The company would then be required to comply with the more extensive ongoing reporting requirements of public companies.

Are Investors limited in whether and how much they can invest in a Regulation A Offering?

There are no limitations on who can invest, or how much a purchaser can invest, in an offering relying on Tier 1. Both accredited and non-accredited investors can participate.

If, however, a non-accredited purchaser is offered an opportunity to invest in a Tier 2 offering of a company not listed on a national securities exchange upon qualification, then there are investment limitations.  In such circumstances, how much individual investors can invest is limited to no more than 10% of the greater of the investor’s annual income or net worth, separate or jointly with their spouse, excluding the value of their primary residence and any loans secured by the residence, up to the value of the residence.

How do investors stay informed about a Regulation A Offering after they invest?

Companies must disclose information with the SEC using EDGAR but the type and frequency of this information may differ from the information that investors may be familiar with when investing in companies listed on a stock exchange, for example.  Companies relying on Tier 1 do not have ongoing reporting obligations other than a final report on the status of the securities offering.  Unlike Tier 1, Regulation A Companies relying on Tier 2 have ongoing SEC Reporting Requirements.  The following are descriptions of the Regulation A disclosure forms:

Form Description Tier 1 Tier 2
1-A The Regulation A offering disclosure document is known as Form 1-A and includes the Offering Circular and other disclosures about the offering.
1-Z The Regulation A exit report is known as Form 1-Z and it details the termination or completion of an offering.  Companies relying on Tier 2 may also disclose this information on Form 1-K.
1-K The annual report for a Regulation A Reporting Company is known as Form 1-K. Form 1-K must be filed within 120 days after the end of the fiscal year that includes audited financial statements for the year, a discussion of the company’s financial results for the year, and information about the company’s business,  management, related-party transactions, and share ownership.
1-SA The semiannual report for a Regulation A Reporting Company is known as 1-SA  and must be filed within 90 days after the end of the semiannual period that includes unaudited interim financial statements and a discussion of the company’s financial results for the period.
1-U The current report for a Regulation A Reporting Company is known as Form 1-U. Form 1-U is required be filed within four business days of certain events including bankruptcy, any fundamental changes, changes in accounting, changes in the control and departure of officers, and  non-reliance on prior financial statements or audit reports.

For more information about using Regulation A+, please contact Brenda Hamilton, Securities Lawyer, at (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. This information should not be construed as, and does not constitute, legal advice on any specific matter. This information does this information create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.