Regulation A SEC Reporting Requirements After Qualification

Before starting a new offering, companies must consider a series of crowdfunding rules and regulations.  Regulation CF's crowdfunding rules are found in Section 4(a)(6) of the Securities Act of 1933, as amended (the "Securities Act"). These rules have made it easier for companies to raise money from a wider range of investors than ever before. Traditional crowdfunding models may or may not involve the offer and sale of a security, but if so, the issuer must comply with federal and state securities laws. One notable benefit of Regulation CF is that state blue-sky laws are preempted.
My Regulation A Offering Is Qualified. Now What?

Once the SEC has qualified a Regulation A Offering Circular on Form 1-A, the company must begin reporting under the Regulation A standard.  As we explain below, Tier 1 and Tier 2 are treated differently for purposes of Regulation A SEC reporting.  While Regulation A reporting is less burdensome than SEC reporting requirements, issuers should be prepared to provide the required information in a timely manner.

Regulation A Tier 1: Exit Report

Once a company’s Form 1-A offering statement filed pursuant to Regulation A has been qualified by the SEC, it must making certain filings with the SEC. These filings include an exit report on Form 1-Z which must be filed no later than 30 calendar days after the termination or completion of the offering. Issuers conducting Tier 2 offerings are required to provide this information in Part I of Form 1-Z, if such information was not previously provided on Form 1-K as part of their annual report, at the time of filing information in response to Part II of Form 1-Z. The Form 1-Z exit report must provide information about the offering, including:

  • The number of securities sold,
  • The names of underwriters and other service providers involved and the fees they received, and
  • Net proceeds to the issuer.

Tier 2 On-Going Reporting Forms and Requirements

FormDescription
Form 1-KAnnual reports on Form 1-K must be filed within 120 days after the end of the fiscal year.
1-SAThe 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.
1-UThe current report for a Regulation A reporting company is known as Form 1-U is required be filed within four business days of certain material events including bankruptcy, and fundamental changes, changes in accounting, changes in the control and departure of officers, and non-reliance on prior financial statements or audit reports.

Annual Reports on Form 1-K

Form 1-K consists of two parts: Part I, Notification and Part II, Information to be Included in the Report.

Part I (Notification)

Part I of Form 1-K is an online XML-based fillable form that will include certain basic information about the issuer, prepopulated on the basis of information previously disclosed in Part I of Form 1-A, which can be updated by the issuer at the time of filing. Additionally, if at the time of filing the Form 1-K, an issuer has terminated or completed a qualified Regulation A offering, it is required to provide certain updated summary information about itself and that offering in Part I. The information that must be provided includes the date the offering was qualified and commenced, the amount of securities qualified, the amount of securities sold in the offering, the price of the securities, the portions of the offering that were sold on behalf of the issuer and any selling security holders, any fees associated with the offering, and the net proceeds to the issuer.

Part II (Information to be included in the Report)

As with Part II of Form 1-A, Part II of Form 1-K must be submitted electronically as a text file attachment containing the body of the disclosure document and financial statements, formatted to be compatible with the EDGAR filing system. Part II requires issuers to disclose information about themselves and their business based on the financial statements and narrative disclosure requirements of Form 1-A.

Form 1-K covers:

  • business operations of the issuer for the prior three fiscal years (or, if in existence for fewer than three years, since inception);
  • transactions with related persons, promoters, and certain control persons;
  • beneficial ownership of voting securities by executive officers, directors, and 10 percent owners;
  • identities of directors, executive officers, and significant employees, with a description of their business experience and involvement in certain legal proceedings; executive compensation data for the most recent fiscal year for the three highest-paid executive officers or directors;
  • Management’s Discussion and Analysis (MD&A) of the issuer’s liquidity, capital resources, and results of operations covering the two most recently completed fiscal years; and
  • two years of audited financial statements (or fewer if the company has been in business for fewer than two years).

Form 1-K must be filed within 120 calendar days after the issuer’s fiscal year-end, not the 90 days required for a Form 10-K for 1934 Act filers. For offerings qualified in the first quarter of the issuer’s fiscal year, the deadline is extended to 120 days after the date of qualification.

The annual financial statement audit can be a complex and time-consuming process. Retaining an auditor before your fiscal year closes can save some hassles (like having him present for the inventory count instead of needing to go through a far worse audit procedure on inventory) and helps in ensuring a quick turnaround from your auditor by getting scheduled time. Auditors’ pricing often varies by the month of the year, so if fees are a concern for you, discuss timing with your auditor and see if they can knock the price down to do their work in their slower months.  You may also consider making your fiscal year end date other than December 31 to avoid the busy annual report audit season.  But if you do so, make sure you pick a quarter end:  March 31, June 30 or September 30, or it will become quite confusing for everyone involved.  You may want to involve your legal counsel in this decision right up front, before you form your corporation.

Semiannual Reports on Form 1-SA

Issuers are required to provide semiannual reports on Form 1-SA that, much like reports on Form 10-Q, consist primarily of financial statements and MD&A. Form 1-SA also requires disclosure of updates otherwise reportable on Form 1-U (see below). Unlike Form 10-Q, however, Form 1-SA does not require disclosure about quantitative and qualitative market risk, controls and procedures, updates to risk factors, or defaults on senior securities.

Issuers may incorporate by reference in Form 1-SA certain information previously filed on EDGAR but must include a hyperlink to that material. Form 1-SA must be filed within 90 calendar days after the end of the first six months of the issuer’s fiscal year. The first such obligation to file will commence immediately following the most recent fiscal year for which full financial statements were included in the offering statement, or, if the offering statement included financial statements for the first six months of the fiscal year,  following the most recent full fiscal year, for the first six months of the following fiscal year.

For example, where an offering statement is filed in October 2019 and includes full financial statements for the fiscal years ended December 31, 2018, and December 31, 2017, and interim financial statements for the six months ended June 30, 2019, and June 30, 2018, and is qualified in December 2019, the Form 1-SA will not be required until within 90 days following the first six months of the following fiscal year (i.e., within 90 days following June 30, 2020). If, however, the offering statement is filed in March 2019 and qualified in June of 2019, then the first Form 1-SA would cover the six months ended June 30, 2019, and June 30, 2019, and would not be required to be filed until within 90 days following June 30, 2019.

These financial statements are not required to be audited or reviewed by your auditor, though the auditor likely will still want to be involved.

Current Reports on Form 1-U

In addition to the annual report on Form 1-K and semiannual report on Form 1-SA, any Tier 2 issuer is required to submit current reports on Form 1-U when it experiences one (or more) of the following events:

  • Fundamental changes (see discussion below),
  • Bankruptcy or receivership,
  • Material modification to the rights of security holders,
  • Changes in the issuer’s certifying accountant,
  • Non-reliance on previous financial statements or a related audit report or completed interim review,
  • Changes in control of the issuer,
  • Departure of the principal executive officer, principal financial officer, or principal accounting officer, or
  • Unregistered sales of 10 percent or more of outstanding equity securities.

A fundamental change requiring the filing of a Form 1-U is limited to the entry into or termination of material definitive agreements resulting in fundamental changes in the nature of an issuer’s business, which includes major and substantial changes in the issuer’s business or plan of operations or changes reasonably expected to result in such changes, such as significant acquisitions or dispositions, or the entry into, or termination of, a material definitive agreement that has or will result in major and substantial changes to the nature of an issuer’s business or plan of operation. An acquisition transaction will only result in a fundamental change for these purposes if the purchase price, as defined by U.S. GAAP and IFRS, exceeds 50 percent of the total consolidated assets of the issuer as of the end of its fiscal year.

Item 9 of final Form 1-U contains provisions for disclosing other events not directly required of issuers in the form. Item 9 is significant because issuers that voluntarily elect to provide relevant information to the market on, for example, a quarterly basis may do so pursuant to Item 9.

Form 1-U must be filed within four business days after the occurrence of any of the triggering events, and, where applicable, will permit issuers to incorporate by referencing certain information previously filed on EDGAR. Incorporation by reference is not limited to information previously filed pursuant to Regulation A.

Where in connection with a succession by merger, consolidation, exchange of securities, acquisition of assets, or otherwise, securities of an issuer that are not subject to the reporting requirements of Regulation A are issued to the holders of any class of the issuer’s securities that are subject to ongoing reporting under Tier 2, the issuer succeeding to that class of securities must continue to file the reports under Regulation A on the same basis as would have been required of the original Tier 2 Issuer. The successor issuer may suspend or terminate its reporting obligations on the same basis as the original issuer under Rule 257 of the Securities Act.

TERMINATION OR SUSPENSION OF TIER 2 DISCLOSURE OBLIGATIONS

Issuers that conduct a Tier 2 offering may terminate or suspend their ongoing reporting obligations on a basis similar to the provisions that allow issuers to suspend their ongoing reporting obligations under Section 13 and Section 15(d) of the Exchange Act. A Tier 2 issuer that has filed all reports required by Regulation A for the shorter of:

  • the period since the issuer became subject to such reporting obligation, or
  • its most recent three fiscal years and the portion of the current year that applies may file Form 1-Z to immediately suspend its ongoing reporting obligation under Regulation A.  Issuers seeking to terminate or suspend their Tier 2 ongoing reports in a Tier 2 offering under Regulation A are suspended immediately upon the filing of a notice to the SEC on Part II of Form 1-Z.

For further information about Regulation A+ or this securities law blog, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. 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.

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
www.SecuritiesLawyer101.com