Regulation A + l Rule 506 l Form S-1 Comparison 2019
Regulation A+ provides smaller companies with a flexible alternative to raising capital and going public in connection with direct public offering (DPO) and/or traditional initial public offering (IPO). Recent amendments allow companies that are subject to SEC reporting requirements to use Regulation A. + for their securities offerings. Going public is not mandatory, Regulation A+ can be used by both private companies and companies seeking public company status.
For companies going public on the OTC Markets, Regulation A+ streamlines the process of obtaining the stockholders necessary to establish an active trading market as required by the Financial Industry Regulatory Authority (“FINRA”) for the assignment of a stock trading symbol.
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 SEC reporting requirements. As discussed below, Regulation A SEC reporting requirements are scaled down in comparison to those imposed after the filing of a Form S-1.
Eligibility to Use Regulation A+
Regulation A+ is limited to companies organized in and with their principal place of business in the United States or Canada. Regulation A+ would not be available to companies that:
- 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 Regulation A Tier 2 offerings. Regulation A 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 Actors In Regulation A + Offerings
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 with respect to the involvement of certain “bad actors”
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 SEC.
- 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. It should be noted that auditors of companies conducting Regulation A+ offerings do not have to be registered with the Public Company Accounting Oversight Board (“PCAOB”)
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 with the SEC on a Form S-1 Registration Statement.
|Regulation A+||Rule 506(b)||Accredited Crowdfunding-Rule 506(c)||Form S-1/DPO-IPO|
Aggregate Amount 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) 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.||Accredited investors only.||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.
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.
Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the Frankfurt Stock Exchange, London Stock Exchange, NASDAQ Stock Market, the NYSE MKT and OTC Markets. For two decades the Firm has served private and public companies and other market participants in SEC reporting requirements, corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/ Regulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, Form F-1, Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10-K and Form 8-K, Form 6-K and SEC Schedule 14C Information and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India, France, Israel, Canada and throughout the U.S.