Regulation A has been described by industry experts as a “mini IPO” (initial public offering). Shares are not publicly traded but the requirements to raise capital under Regulation A is very similar to a full blow initial public offering that many issuers (companies) specifically avoid because of the high regulation and costs.
What is Regulation A +?
On March 25, 2015, the Securities & Exchange Commission (S.E.C.) adopted final rules to encourage and direct smaller companies’ access to capital through Regulation A. These new rules are often referred to as “Regulation A+”. But does it deserve the grade of A+?
The new rules update and expand Regulation A, which is an existing exemption from registration from smaller issuers of securities. These rules are a result of the 2012 passage of the “Jump Start Our Businesses” Act (JOBS Act). Here is a general breakdown of the new regulations which are divided into 2 tiers and allows smaller companies to offer and raise up to $50M of securities in a 12 month period, subject to eligibility, disclosure and reporting requirements.
2 Types of Exemptions
Tier 1 (Offer up to $20M in a 12 month period)
- Not more than $6M in sales can be to security-holders who are affiliates of the issuer
- Subject to federal and state registration and qualification requirements
Tier 2 (Offer up t $50M in a 12 month period)
- Not more than $15M in sales can be to security-holders who are affiliates of the issuer
- Subject to additional disclosure and ongoing reporting requirements, including providing audited financial statements, and annual (10K), semi annual (10Q) and current event (8K) reports.
- Preemption of state securities law registration
- Qualification requirements for securities offered or sold ot “qualified purchasers”
- A limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10% of the greater of the investors’s annual income or net worth
- Exempt securities from the mandatory registration requirements of Exchange Act Section 12(g) if the issuer meets certain conditions.
In addition, the exemption is limited to companies organized in and with their principal place of business in the United States or Canada. The exemption would not be available to certain other companies listed under the Rule.
Does the new Reg. A get an “A+?”
That remains to be seen. The rules were just passed March of this year and only became effective 60 days from the date of that S.E.C. publication so the end of June. The time period to raise funds is 1 year so June of 2016 hopefully we will have data to support the original intentions of adopted a new Regulation A—to improve access to capital for larger amounts for smaller companies.
I imagine that the most attractive of these 2 exemptions will be Tier 2 since it is exempt from state “blue sky laws” IF the issuing company is doing a raise in multiple states over $20M. But if its more cost effective for an issuing company to raise capital in a few states, comply with state laws, to avoid the on going reporting and disclosure requirements of Tier 2, that may be a better option. Each situation is different and should have the advice of counsel and a good accountant.
NOTE: I will be discussing this subject in detail during my “Power Raisers” weekly conference call this Monday (Oct. 26th) at 11 am EST. Visit the News & Events section of my website for more information.
I am Dar’shun Kendrick, Private Equity Attorney and Owner of Kendrick Law Practice, helping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private equity or debt that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so. I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. NOTE: I will be discussing this subject in detail during my “Power Raisers” weekly conference call this Monday (Oct. 26th) at 11 am EST. Visit the News & Events section of my website for more information.
We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our famous 10 point Business Legal Consultation for 1 hour.
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