Blue Sky Laws and Secondary Trading and Resales in Regulation A Offerings

There are two offering tiers, Tier 1 and Tier 2 in Regulation A+ and each is treated differently under both SEC and State Blue Sky laws.

State Blue Sky laws apply to Regulation A Offerings for both the offer and sale of securities by the issuer and the resale by investors.  A sometimes overlooked consideration in  Regulation A+ offerings is how these State Blue Sky laws impact liquidity and resales by investors in the offering, referred to as secondary sales.  Considering market liquidity for investors is important for a successful capital raise so that investors understand their exit strategy.

Generally, every offer and sale of a security must either be registered with the U.S. Securities & Exchange Commission (“SEC”) or the offer and sale must qualify for a SEC Exemption from registration. This is true for both offerings by the issuer of the securities and resales by investors who purchase the issuer’s securities.  Like the federal securities laws, State Blue Sky laws provide for securities registration and exemptions from such registration.

The trading of issuers listed on National Security Exchanges such as the New York Stock Exchange (“NYSE”) and the NASDAQ Stock Market (“NASDAQ”)  are exempt from State Blue Sky laws that govern secondary trading. Notwithstanding the fact that companies quoted on the OTC Markets must comply with State Blue Sky laws ­and investors in OTC Markets issuers must comply with the rules applicable to resales for the securities they purchase in Regulation A Offerings.

Regulation A Tier 1 v Tier 2 –State Blue Sky Compliance in Regulation A Offerings

There are two offering tiers, Tier 1 and Tier 2 in Regulation A+ and each is treated differently under both SEC and State Blue Sky laws.

Regulation A+ Tier 1 provides an exemption from SEC registration, which allows an issuer to raise up to $20 million in a 12-month period. Tier 2 of Regulation A increases this amount to $50 million in a 12-month period. An issuer proposing less than $20 million securities can choose to continue under Regulation A+’s Tier 1 or Tier 2 so long as they comply with the applicable requirements.

Companies making securities offerings under Regulation A+ Tier 1 must comply with the specific rules and regulations of each state where it plans to offer and sell the securities. Companies are encouraged to utilize the North American Securities Administrators Association (“NASAA”)  review program.  Under the NASAA coordinated review program, issuers conducting Regulation A Tier 1 securities offerings are permitted to send their Regulation A offering materials to the administrator of the review program by email. Upon approval, the Tier 1 securities offering will be in compliance with the applicable blue sky laws in the states that participate in the NASAA coordinated review program.

Securities offerings made pursuant to  Tier 2 of Regulation A+ are “covered securities” under the National Securities Markets Improvement Act of 1996  (“NSMIA”) and are exempt from state blue sky laws; however,  states sometimes may require the issuer to pay a filing fee and/ or provide a copy of offering materials. It should be noted that compliance with the NSMIA does not eliminate the requirement to comply with state broker dealer and anti-fraud provisions.

Affiliate v Non-Affiliate Resales in Regulation A+ Offerings

Resales of securities purchased by affiliates and non-affiliates in Regulation A offerings are handled in a different way. Secondary sales of affiliates of the issuer are limited to no more than 30% of the total dollar amount of the qualifying Regulation A+ offering. After the end of the first year, secondary sales by non-affiliates are allowed up to the maximum offering amount under both Tier 1 or Tier 2 of Regulation A+.

Secondary Trading in Regulation A+ Offerings

Even though an issuer may be in compliance with the State Blue Sky laws that apply to its Regulation A+ securities offering, the issuer must still comply with the state laws that apply to secondary trading. This ensures that the investors in the issuer’s Regulation A+ + offering can resell their shares if they choose to do so.   State blue sky compliance may become more complicated for issuers conducting both Tier 1 and Tier 2 offerings after securities are issued and investors seek to resell of the securities they purchased.

Manual Exemption for Resales After Regulation A+ Offerings

38 states currently recognize the Manual Exemption for secondary trading of securities sold in Regulation A+ Offerings. For the exemption from registration to be available,  the issuer and the security must be listed in a securities manual recognized by the specific state. The names of the issuer and its officers and directors, the issuer’s balance sheet; and a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations must be published in the securities manual

Unsolicited Brokerage Transactions

Regulation A+ Offering purchasers may also rely on the exemption for unsolicited brokerage transactions, which exempts a non-issuer’s transaction by or through a brokerage -deal effecting an unsolicited order or, they can offer to purchase a security.  The Unsolicited Brokerage Transaction exemption is not accessible for any unsolicited transactions by or through the issuer directly.

Issuers conducting securities offering under Regulation A should consider the following factors impacting liquidity and resales:

  • Secondary sales of securities by investors in Tier 1 Regulation A Offerings are limited to $6 million in a 1 month period.
  • Secondary sales of securities by investors in a Tier 2 Regulation A Offering, at the time of the Regulation A offering and 12 months thereafter cannot exceed 30 percent of the aggregate offering price of the offering.
  • The shares sold by non-affiliates in Regulation A + Offering are unrestricted securities upon qualification by the SEC of the Form 1-A Offering Circular.
  • For issuers seeking quotation on the OTC Markets, the issuer’s sponsoring market maker may immediately file a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) to initiate quotation of the issuer’s shares upon SEC qualification of the Regulation A+ offering.
  • The issuers eligibility to be quoted on OTC Markets OTCQX and OTCQB will occur after FINRA clearance of the Form 211.
  • The sponsoring market maker will quote the issuer’s shares for first 30 days, after clearance of the Form 211 by FINRA.
  • State blue sky laws relating to secondary trading are applicable to secondary trading of securities sold in Regulation A Offerings & issuers should ensure an exemption is available.

This securities law blog post is provided as a general informational service about Regulation A and going public 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.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North

Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855