Reg A+ Securities Offerings and FAST Act

Prospective For Underwriters & Broker-Dealers: Due Diligence Considerations

Unlike traditional Initial Public Offerings (“IPOs”), there is no potential liability for issuers under Section 11 of the Securities Act in connection with Regulation A+ offerings. Sellers in Regulation A+ offerings are potentially liable under Section 12(a)(2) of the Securities Act for materially misleading statements in the offering circular or in oral communications. Accordingly, the potential Securities Act liability of issuers under a Regulation A+ offering is less than in connection with a Rule 506 offering but greater than in connection with an IPO.

As such, underwriters and broker-dealers participating in a Regulation A+ offering should require a level of due diligence and disclosure comparable to that of offerings registered with the Securities & Exchange Commission (“SEC”).

Tier I and Tier II offerings will be subject to review by the Financial Industry Regulatory Authority (“FINRA”) if broker-dealers participate in the Regulation A+ offering.

Under FINRA Rule 5110(b)(1), no FINRA member or associated person may participate in a public offering unless the offering has been filed with and reviewed by FINRA. In addition, FINRA Rule 5110(b)(9)(G) specifically includes securities offered pursuant to Regulation A+ as a public offering that must be filed with FINRA. Offering materials will be subject to FINRA comment and review, which includes a thorough assessment of the underwriting terms and arrangements.

Proper due diligence will help ensure a smooth FINRA comment process.

Benefits and Costs: Comparison with Conventional IPOs v. Regulation D Private Placements

The costs associated with third-party advisors, such as the issuer’s securities attorney and auditor, will be lower in a Regulation A offering than in an IPO. Since disclosure requirements are less than that of an IPO, management will be required to devote less time to the preparation of the Form 1-A offering circular. A registration statement on Form S-1 is typically subject to full review by the SEC staff in connection with an issuer’s IPO. At the same time, the review process undertaken by SEC staff in a Regulation A+ offering will be generally shorter than the review and comment process in a registration statement. Generally, issuers will provide fewer disclosures than a Regulation A offering to investors in a private placement offering. As such, the cost of a private placement is typically less than an IPO or Regulation A offering.

Comparison with Conventional IPOs v. Regulation D Private Placements

  • Regulation A+ requires less extensive disclosure documents unless the issuer uses the simplified Exchange Act registration procedure.
  • Regulation A+ is generally less expensive because of scaled-down disclosure requirements.
  • Regulation A+ is potentially faster than an IPO because of reduced disclosures and faster SEC review.
  • There are no ongoing reporting requirements for Regulation A+ as Tier 1 offerings and Tier 2 offerings have scaled down on disclosure requirements.

The advantages of an IPO compared to Regulation A+ are:

  • There are no limitations on the amounts that can be raised in an IPO. Regulation A+ contains the Tier 1 and Tier 2 offering amount limitations.
  • There are no limitations on purchases by non-accredited investors in an IPO. Tier 2 Regulation A+ offerings are subject to the investment limitation provisions.

Comparison with Conventional IPOs v. Regulation D Private Placements

  • The IPO provisions require less public disclosure of solicitation materials for emerging growth companies.
  • Issuers have the benefit of information in Schedules 13D and 13G that are not required in Regulation A+ offerings.

Regulation A+ provides a potentially faster and less expensive method of going public than a traditional IPO. There are limitations on the amounts that can be raised and in Tier 2 offerings on investments by any non-accredited investors. The ongoing reporting requirements in Tier 2 offerings are scaled down from those for SEC reporting companies.

According to the SEC, Regulation 506 is used more than any other exemption from registration. Rule 506 provides two distinct exemptions:

  • Rule 506(b) is a traditional private placement, where general solicitation is prohibited, and the offering can include up to 35 non-accredited investors and an unlimited number of accredited investors.
  • In Rule 506(c) offerings, the issuer may use general solicitation as long as it verifies that all purchasers are accredited investors.

Comparison with Conventional IPOs v. Regulation D Private Placements

The advantages of Regulation A+ in comparison to Rule 506 offerings include:

  • Securities issued in Regulation A+ offerings are not “restricted securities.” Securities issued in Rule 506 offerings are restricted securities. The potential for a secondary trading market after a Regulation A+ offering is far greater than a Regulation A offering.
  • In Regulation A+ offerings, securities can be offered to the general public using general solicitation. While general solicitation is allowed under Rule 506(c), sales can only be made if the issuer takes reasonable steps to verify that the purchasers are accredited investors. Rule 506(b) does not allow general solicitation.
  • Issuers are not required to use reasonable methods to verify accredited investor status in Tier 2 Regulation A+ offerings. Unlike Rule 506(c), issuers in a Regulation A+ offering can rely on purchaser self-certification unless the issuer has actual knowledge that the purchaser’s self-certification is incorrect.
  • There is no limit to the number of non-accredited investors in a Regulation A+ offering. Rule 506(c) does not allow sales to non-accredited investors. In Rule 506(b) offerings, only 35 non-accredited investors can be purchasers.

Comparison with Conventional IPOs v. Regulation D Private Placements

The advantages of Rule 506 over Regulation A+ are the following:

  • There are no limitations on the amounts that can be raised under Rule 506. Regulation A+ offerings are subject to the Tier 1 and Tier 2 caps.
  • Rule 506 always preempts state securities registration requirements other than notice filings and anti-fraud provisions. Tier 1 Regulation A+ offerings are subject to state securities registration requirements.
  • There are no mandatory disclosure provisions if sales are made only to accredited investors. Regulation A+ contains substantial various disclosure requirements.
  • The SEC does not review the offering documents as a Rule 506(c) offering. Regulation A+ offerings, like registration statement documents, are required to be filed with and are subject to review and comments by the SEC.  Additionally, Tier 1 offerings are subject to review by state regulators.
  • Rule 506 does not impose ongoing reporting obligations, while Regulation A+ Tier 2 offerings impose ongoing reporting obligations.

What Companies Should Do To Prepare For A Regulation A+ Offering

  • Planning ahead for a Regulation A+ offering will prevent common pitfalls that issuers encounter during the securities offering process.
  • The most important step in planning ahead for issuers planning a Regulation A+ offering is to understand the exemption’s requirements and limitations.
  • Issuers should consider the cost they will incur in conducting their Regulation A+ offering, complying with ongoing reporting obligations and costs associated with public company status. Along with the IPO’s transactional fees and costs for underwriters, SEC registration, FINRA filing, legal counsel and accountants, there are also listing and transfer agent fees. After a Regulation A+ Tier 2 offering, there are ongoing public reporting costs and associated professional fees.
  • Issuers should define their business strategy and identify their future plans. Issuers should get their house in order including compiling their unaudited financial statements and getting their corporate book updated.
  • Issuers should ensure they have sufficient management in place to deal with the capital raising process and associated disclosure obligations.
  • Issuers should decide whether they will conduct their offering or use the services of an underwriter.
  • Issuers should address how investors will have an exit strategy after the Regulation A offering.
  • Regulation A provides for multiple structures and issuers should decide whether their goal is to have their securities publicly traded after their Regulation A Offering.
  • Before closing the Regulation A offering, the issuer should ensure it meets the requirements for obtaining a ticker symbol if it plans to go public. Companies that do not meet the requirements of listing on a national securities exchange must meet FINRA’s requirements for a ticker symbol assignment. For companies seeking to be quoted on the OTC Markets, the issuer should have at least 35 shareholders who paid cash consideration for their shares and own at least 500 shares of a company’s stock each.  The issuer should also ensure it can locate a sponsoring market maker to sponsor its Form 211 application with FINRA.
  • A transfer agent is the custodian of the company’s shareholder records, including purchases, sales, transfers and account balances.  After a going public transaction, as the company’s securities begin to trade actively, it becomes critical to have efficient transfer agent operations. Setting up transfer agency early and then issuing and shipping shares to initial subscribing shareholders is a formality that helps avoid confusion and extra burdens for the issuer.


For further information about this securities law blog, please contact Brenda Hamilton, Securities Attorney, at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (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 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.

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