Regulation A+ Q & A – Regulation A+ Going Public Lawyers

Regulation A+ Lawyers Q&A

Regulation A Lawyers Explain Regulation A With Q&A

Regulation A provides an existing exemption from registration with the Securities and Exchange Commission (“SEC”) 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 allowing the issuer to avoid the risks of reverse merger transactions. Regulation A simplifies the process of obtaining the seed stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital.

he process of “going public” with Regulation A is complex and can be structured a number of ways.  While going public offers many benefits it also comes with risks and quantities of regulations with which issuers must become familiar.   Despite the risks even in a down economy, the U.S. markets remain an attractive source of capital for both domestic and foreign issuers.  It is important for issuers to have an experienced securities attorney to help navigate through the process and deal with the SEC, Financial Regulatory Authority (“FINRA”) & Depository Trust Company (“DTC”).  Upon completion of a going public transaction, a non-reporting company is subject to the regulations that apply to companies using Tier 2 of Regulation A, including those of the Securities Act of 1933, as amended (“Securities Act”) and Securities Exchange Act of 1934, as amended (“Exchange Act”).

This blog post addresses common questions we receive about the going public using Regulation A Offerings.

Q. Can All Companies Use Regulation A?

A. No. 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 offering.

Q. Can Companies subject to Public Company SEC Reporting Requirements Use Regulation A?

A. Yes, both reporting and non-reporting companies can conducting offerings using Regulation  A.

Q. What is a Form 1-A Offering Statement?

A. The Regulation A+ Form 1A offering statement has three parts: Part I, which requires basic issuer information such as the details about the security being offered, the jurisdictions where the securities will be offered, and recent sales of unregistered securities. Part II, requires the business, management, financial statement, and other substantive disclosures. Part III, contains exhibits and related documents.

Q. What Securities Can Be Included in the Form 1-A Offer Circular Under Regulation A?

A. Regulation A is limited to shares, warrants and convertible equity securities. As such, the Form 1-A offering circular can only include these securities.

Q. How Much Can I Raise With Regulation A?

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.

Q. Can a Company’s Existing Shareholders Register Shares In A Regulation A Offering?

A. Yes. For a Tier 1 offering, secondary sales are limited to $6 million in a 12- month period. For Tier 2 offerings, secondary sales are limited to $15 million in a 12-month period. Additionally, secondary sales at the time of an issuer’s first Regulation A offering and within 12 months thereafter cannot exceed 30 percent of the aggregate offering price of that particular offering and for affiliates only, the $6 million and $15 million annual limitations on secondary sales continue indefinitely.

Q. Who Can Invest In A Regulation A Offering?

A. Both accredited and non-accredited investors can participate in Regulation A+ offerings. In a Tier 2 Offering, if the issuer 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), whichever is greater.  There is no cap on the amounts an accredited investor may invest in either Tier 1 or Tier 2.

Q. Are Shares Issued in Regulation A Offerings Restricted Securities?

A. Shares sold in a Regulation A offering are not “restricted 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, other than the holding period requirement.

Q. Do I Have To File Reports With the SEC After My Regulation A Offering Is Approved?

A. 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 completed 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 offering 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 requirements.

Q. Are Regulation A Filings Submitted On EDGAR?

A. Yes. All Regulation A filings must be made through the SEC’s electronic filings system, known as EDGAR.

Q. What SEC Periodic Reporting Requirements Apply To Tier 2 Issuers After Effectiveness of the Form 1-A Offering Circular?

A. Tier 2 issuers becomes subject to Regulation A reporting obligations. 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.

Regulation A ongoing requirements for Tier 2 issuers include: (i) annual reports on new Form 1-K, which will include the same information required in a Form 1-A, and Regulation A offering circular other than the offering-specific information; (ii) semiannual reports on new Form 1-SA which includes 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 report or interim review, 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 semiannual report, financial reports on new Forms 1-K and 1-SA are required for periods where there are gaps in the financial information.

Q. Are Financial Statements included in the Form 1-A Offering Circular  Required To Be Audited?

A. For Tier 1 Regulation A offerings,  an audit is not required. For Tier 2 offerings, Audited Annual Financial Statements must be provided by the Company’s independent auditor. Note the auditor does not have to registered with the Public Company Accounting Oversight Board.

Q. What Periods Are Required To Be Audited?

A.  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.

Q.  Can A Tier 2 Issuer Become an SEC Reporting Company Under the Exchange Act By Filing a Registration Statement On Form 8-A Instead Of Form 10 Registration Statement?

A. Yes, a Tier 2 issuer can use Form 8A to register a class of securities under the Exchange Act concurrently with the qualification of a Tier 2 offering?

Q.  Can A Company Suspend Its Regulation A Reporting Requirements?

A. Yes. A company can suspend its ongoing reporting obligations 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.

Q. Are Issuers In Tier 2 Offerings Exempt From Section 12(g) Reporting?

A. Securities issued in a Tier 2 offering are exempt from the Exchange Act registration 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:

  • the issuer has engaged a transfer agent that is appropriately registered with the SEC; and
  • the 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).

Q. Do I Have To Register My Regulation A Offering With State Regulators?

A. Regulation  A also 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 of the North American Securities Administrators Association (NASAA). Companies should remember that states retain authority to: 

  • require the filing of any documents filed with the SEC “for notice purposes and payment of fees”;
  • enforce filing and fee requirements by suspending offerings within a given state; and
  • investigate and bring enforcement actions with respect to fraudulent securities offerings.

Q. Does The Integration Rule Apply To Regulation A Offerings?

A. Regulation A+ offerings will not be integrated with prior offers or sales of securities. Subsequent offers or sale will not be integrated with securities offerings that are:

  • 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.

Q. Are Bad Actors Banned From Regulation A Offerings?

A. 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 Securities & Exchange Commission 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. 

 Q. Why do companies Go Public?

 A. Most companies go public to raise money.  It is much easier for a public company to locate capital than it is for a private company.  Funds raised in going public transactions can be used for working capital, research and development, retiring existing indebtedness, acquiring other companies or businesses or paying suppliers.

Q. What are other advantages of Going Public?

A. Numerous additional benefits come with being publicly traded including:

  • Once a going public transaction is complete, the company will be able to use its common stock as a form of currency and as collateral for loans;
  • going public creates value for an issuer’s securities;
  • going public also creates liquidity for existing and future investors, and provides an exit strategy for shareholders and/or investors;
  • public companies have greater visibility than private companies.  It is easier to build recognition of a public company than a private one.  Publicly traded companies are often promoted and gain publicity from their status as a public company.  Further, the media has greater economic incentive to provide coverage of matters concerning public companies than private companies because there are more shareholders and investors seeking information about the company;
  • going public may allow a private company to attract more qualified employees and key personnel, such as officers and directors because it allows the company’s management and employees to share in its growth and success through stock options and other equity-based compensation; and
  • there is a certain amount of prestige associated with public company status or service to a public company.

Q. Can Regulation A be used in a Direct Public Offering?

A. A direct public offering is an offering conducted by a company on its own behalf without an underwriter. Regulation A can be used in a direct public offering.

Q. Can a Regulation A Offering be used in a Going Public transaction?

A. Yes, Tier 2 is can be used as part of a going public transaction and assist the issuer in obtaining the number of stockholders required by FINRA to obtain a stock trading symbol.

Q. Do I have to file a registration statement with the SEC if I Use Regulation A to Go Public?

A. No. If you use Tier 2 of Regulation A, you do  not need to file a registration statement to go public.

Q. What Are The Advantages Of Regulation A?

A. Regulation A Offers Numerous Benefits. Among Them Are:

  • Because securities sold in Regulation A offerings are unrestricted, investors and shareholders have an exist strategy.
  • Issuers can voluntarily become a full SEC reporting company by using Form 8-A and list on a national securities exchange upon closing of the offering.
  • Regulation A+ allows both accredited and non-accredited investors to participate creating a large investor pool.
  • State Blue Sky Laws are preempted in Tier 2 offerings.
  • Regulation A+ offers two tiers of offerings providing flexibility to investors.
  • Disclosure requirements are scaled down from those required in an SEC registration statement.
  • Tier 2 can enable the issuer to have its securities publicly traded.

For further information about this securities law Q & A or to speak with a Regulation A going public lawyer, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, Florida, (561) 416-8956, or [email protected]101.com. 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.

Hamilton & Associates | Regulation A+ Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com