For many years, SEC Regulation A languished as an exemption. Almost no one used it. Although securities issued in a Regulation A offering are not “restricted securities” and are thus freely tradable, the exemption was unfamiliar to investors and it was limited to
$5 million. Regulation D Rule 506 remained far more important as a way to raise money.
The dramatically altered new Regulation A has been nicknamed “Regulation A+.”
Regulation A+ may be used by companies organized and with a principal place of business in the United States or Canada except for: a) public companies; b) investment companies, including business development companies; c) blank check companies, which are development stage companies that have stated that their business plan is to engage in a merger or acquisition with an unidentified company or companies; d) Issuers of fractional undivided interests in oil, gas or mineral rights; e) issuers subject to “bad actor” disqualification under Rule 262 of Regulation A; f) issuers that are required to, but that have not, filed with the SEC the ongoing reports required by Regulation A during the two years immediately preceding the filing of a new offering statement under Regulation A; and g) Issuers subject to any order by the SEC denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of a new offering statement.
- Equity securities;
- Debt securities; and
- Debt securities convertible or exchangeable into equity interests,such as preferred debt instruments, including guarantees of such securities.
Regulation A+ provides for two tiers of offerings:
- Tier I for offerings of up to $20 million of securities in a 12-month period; and
- Tier II for offerings of up to $50 million of securities in a 12-month period.
Regulation A limits the amount of securities that selling security holders can sell within the first 12 months to 30% of the aggregate offering price of the particular offering. The new rules distinguish between affiliates and non-affiliates:
Secondary sales by affiliates after the first 12 months following the offering are limited to:$6 million (30% of the maximum offering) over a 12-month period in the case of Tier I offerings; and$15 million (30% of the maximum offering) over a 12-month period in the case of Tier II offerings;
Secondary sales by non-affiliates made with a qualified offering statement after the first 12 months following the offering are not limited except by the maximum offering amount permitted by either Tier I or Tier II, whichever tier is applicable.
Calculation of Offering Limits
Issuers must aggregate the price of all securities for which qualification is currently being sought. This calculation must include securities underlying any rights that are convertible, exercisable, or exchangeable within the first year after qualification or at the discretion of the issuer. When the underlying securities use a pricing formula, as opposed to a known conversion price, the issuer will be required to use the maximum estimated price.
Investment Limits for Non-Accredited Investors
In a Tier II offering, a non-accredited investor may not invest more than 10% of the greater of the investor’s annual income or net worth, exclusive of residence. With entities, the 10% investment limit is based on its revenue or net assets. If the non-accredited investor is buying securities that are convertible into or exchangeable for other securities, the same limitation applies. The investment limit does not apply to investments in securities that will be listed on a national securities exchange.
As distinct from the verification requirement under Rule 506(c), the issuer in a Regulation A sale may rely on a representation by the investor, provided that the issuer does not have actual knowledge to the contrary at the time of sale.
There is a safe harbor exempting Regulation A offerings from integration with:
- Prior offers or sales, including exempt offerings under Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D, or
- Subsequent offers and
sales that are:
- Registered under the Securities Act, except as provided in Rule 255(e), dealing with abandoned offerings;
- Made pursuant to Rule 701 under the Securities Act, dealing with compensatory plan securities;
- Made pursuant to an employee benefit plan;
- Made pursuant to Regulation S “off-shore” offerings);
- Made pursuant to Section 4(a)(6) of the Securities Act (federal crowdfunding); or
- Made more than six (6) months after completion of the Regulation A offering.
Section 12(g) of the Exchange Act
Section 12(g) of the Exchange Act requires that an issuer with total assets exceeding $10 million and a class of equity securities held by either 2,000 persons, or 500 persons who are not accredited investors, register under the Exchange Act. However, Regulation A exempts securities issued in a Tier II offering from the registration requirement of Section 12(g) as long as the issuer remains subject to its Regulation A periodic reporting obligations and the issuer engages the services of a transfer agent registered with the SEC pursuant to Section 17A of the Exchange Act.
The above exemption is available to issuers that resemble “smaller reporting companies” when they have a public float of less than $75 million or, in the absence of a public float, annual revenues of less than $50 million. Further, an issuer that exceeds these thresholds is granted a two-year transition period before being required to register under Section 12(g).
Regulation A offering statements are filed on Form 1-A, which must be filed electronically on EDGAR. Form 1-A has three parts: (1) a fill-able online form, similar to Form D or Form ID, that requires basic information about the issuer and the offering, (2) an offering circular that is used to market the offering to potential investors, and (3) required exhibits.
Regulation A has adopted an “access equals delivery” model, meaning that issuers, intermediaries and dealers can satisfy delivery obligations by simply filing documents on EDGAR, provided that they have noted on any preliminary offering circular that delivery obligations will be satisfied electronically. This allows “electronic-only” offerings, provided that there is investor consent or proof of e-delivery of either the preliminary offering circular or the final offering circular.
Issuers may use preliminary offering circulars to offer securities before qualification by the SEC, but these preliminary offering circulars must be delivered 48 hours before the mailing of the confirmation of sale. There is an exception to this rule for issuers subject to Tier II reporting obligations since they already provide ongoing information to the market.
Issuers and broker-dealers must provide purchasers with either a copy of the final offering circular or a notice that the sale occurred pursuant to a qualified offering circular, including the URL where the relevant document can be found on EDGAR, within two days of the completion of the sale.
CONFIDENTIAL SUBMISSION OF DRAFT OFFERING STATEMENTS
Issuers that have not previously sold securities under either Regulation A or otherwise may submit a draft offering statement for confidential review by the SEC. This filing must be substantially complete and must be submitted via EDGAR. All non-public filings made in this way must be filed not less than 21 calendar days before the qualification of the offering circular.
FORM AND CONTENT
The first part of Form 1-A includes information about the issuer’s identity, industry, size, capital structure, financial statements, the issuer’s eligibility to use Regulation A, and any “bad actor” disqualifications under Rule 262.
The second part of Form 1-A is the offering circular which complies with either the requirements of Part II of Form 1-A, or the requirements of Part I of Form S‑1 or S‑11.
An issuer choosing to follow Form 1‑A must provide information as follows:
- cover page, including name, address, date, title and amount of securities, and price;
- underwriting discount and commissions;
- proceeds to the issuer;
- proceeds to others;
- table of contents with risk factors; dilution; plan of distribution
- underwriter commitments, dealer discounts and commissions, any distribution other than through underwriters,
- any selling security holders and related details
- Intended Use of Proceeds
- Narrative description of the issuer’s business over the past three years, or the period of existence, if less than 3 years,
- Narrative description of the issuer’s physical properties
- Discussion of financial condition and results of operations, including
- Operating results
- Plan of Operations.
- Details on directors, executive officers, and significant employees
- Compensation of directors and executive officers (with Tier I offerings, this information can be provided in the aggregate rather than individually)
- Ownership of securities by executive officers, directors, and 10% holders
- “Interested” or related party transactions (any transaction greater than $50,000 for Tier I, and greater than $120,000 or 1% of total assets for Tier II, with any executive officers, directors, and greater than 10% shareholders, or promoters
- Description of the material terms of the securities being offered
- Financial Statements
- Financial statements must be prepared in accordance with GAAP (unless the issuer is a Canadian company, in which case the statements may be prepared under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)).
- For Tier I offerings, the financial statements need not be audited and must be labeled “unaudited.” If the issuer obtained an audit for other purposes, however, those audited results must be filed.
- Issuers in Tier II offerings must comply with Article 8 of Regulation S-X (Financial Statements of Smaller Reporting Companies).
- Financial statements must be provided for the previous two years. Any interim statement must cover at least six months.
An issuer may elect to provide disclosure based on Part 1 of Form S‑1 or Form S‑11 in lieu of Part II of Form 1-A. Issuers that would qualify as “smaller reporting companies” under those forms may rely on the reduced disclosure obligations required for such companies.
The third part of Form 1-A calls for exhibits, when applicable, as follows:
- Underwriting Agreement
- Charter and By-laws
- All instruments defining security holder rights
- Subscription Agreement
- Voting Agreement
- Material Contracts
- Plan of acquisition, reorganization, arrangement, liquidation, or succession
- Escrow Agreements
- Any letters regarding the issuer’s change of its certifying accountant
- Power of Attorney
- Legal Opinion
- Any “Testing the Waters” Materials
- Any non-public draft offering statement
Form 1-A must be signed by the issuer.
Continuous or Delayed Offerings and Offering Statement Supplements
If an issuer is current in filing its annual and semiannual reports, the issuer is permitted to sell securities in a continuous or delayed offering. In that case, the offering statement must be amended annually to provide updated financial statements. The offering statement must also be updated whenever a fact or event arises that represents a “fundamental change” to the information in Form 1-A.
Continuous or delayed offerings are limited to the following:
- Securities offered or sold by or on behalf of a person other than the issuer or its subsidiary or a person of which the issuer is a subsidiary
- Securities offered and sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of the issuer
- Securities issued upon the exercise of outstanding options, warrants, or rights
- Securities issued upon conversion of other outstanding securities
- Securities pledged as collateral
- Securities that are part of an offering that commences within two calendar days after the qualification date, will be offered on a continuous basis, may continue to be offered for a period in excess of 30 days from the date of initial qualification, and will be offered in an amount that, at the time the offering statement is qualified, is reasonably expected to be offered and sold within two years from the initial qualification date.
Offering statement supplements may be filed by issuers after qualification. Supplements must be filed no later than two days from the earlier of the date of first use of the OC after qualification or the date of determination of pricing information. These supplements contain information omitted from the OC, which can include:
- Final pricing information for offerings where the OC is qualified based on a bona fide price estimate
- Underwriter syndicate information
- New information regarding the volume/price range, provided that this new information does not materially change the disclosure
An offering statement is qualified under Regulation A when it is declared qualified by the SEC or by the Division of Corporate Finance. SEC staff must have the opportunity to review and comment on an offering statement before it can become qualified.
Testing the Waters
Issuers may “test the waters” by soliciting investors to determine interest in an offering before Form 1-A is qualified. Issuers may use solicitation materials before and after the offering statement is qualified. After the offering statement is filed, the current preliminary offering circular must accompany any “testing the waters” materials. If any information in the post-filing materials is or becomes materially inadequate or inaccurate, the issuer must distribute revised information. Issuers must file these solicitation materials as an exhibit to Form 1-A.
Reporting and Blue Sky Issues
Once the SEC qualifies an issuer’s offering under either Tier I or Tier II, the issuer will be subject to a number of continuing reporting requirements.
No ongoing reporting is required for Tier I issuers, unless they elect to be treated as Tier II issuers. However, Tier I issuers are required to disclose a summary of the offering in Part I of Form 1-Z upon the termination of the offering, which includes information about the qualification and commencement dates, the amounts of securities offered and sold, the price, and any net proceeds.
Tier II issuers are required to file reports more frequently with the SEC. Specifically, they must file:
- An annual report on Form 1-K;
- A semi-annual report on Form 1-SA;
- Current event reports on Form 1-U; and
- Forms 1-K and 1-Z upon the termination of the offering.
The annual report on Form 1-K consists of two parts. Part I is a form requiring basic information about the issuer to be filled in. Part II of Form 1-K requires a text attachment containing the disclosure document and financial statements, including financial information for the two most recently completed fiscal years. Form 1-K must be filed within 120 calendar days of the close of the issuer’s fiscal year end.
Semi-annual reports filed on Form 1-SA consist of updated financial information and any management’s discussion and analysis (MD&A). Form 1-SA must be filed within 90 days of the end of the first six months of the issuer’s fiscal year.
Form 1-U or the current event report must be filed there is a “significant event,” including fundamental changes to the company, bankruptcy or receivership, changes in control, or the departure of a principal officer. Similarly to Form 8-K, this report must be filed within four business days after the occurrence of any triggering event.
If Tier II issuers do not include financial statements in their qualification application, they must file special financial reports on Forms 1-K and 1-SA to include audited, or in some circumstances unaudited, financial statements for the most recent fiscal year. Upon the termination or completion of an offering, Tier II issuers are required to disclose a summary of the offering in Parts I of Forms 1-K and 1-Z, including information about the qualification and commencement dates, the amounts of securities both offered and sold, the price and any net proceeds.
TERMINATION OR SUSPENSION OF TIER II REPORTING
Tier II issuers may terminate or suspend their reporting requirements in a number of ways. If a Tier II issuer opts to register its securities under Section 12 of the Exchange Act, its ongoing reporting obligations are automatically suspended, but it must make periodic filings (Forms 10-K, 10-Q and 8-K) as required by the Exchange Act. Further, a Tier II issuer may suspend its ongoing reporting obligations after completing its reporting obligations for the fiscal year in which the offering was qualified with the filing of Form 1-Z. The Tier II issuer must have filed all of its ongoing reports for the shorter of the period since the issuer became subject to such reporting obligation and its three most recent fiscal years, and the portion of the current year most recently preceding the filing of Form 1-Z. Each class of securities offered must be held by fewer than 300 persons and the offering may not be ongoing.
ALL FILINGS MUST BE ELECTRONIC
All reporting obligations under Regulation A must be made electronically using the SEC’s EDGAR filing system.
Character of Securities under the Exchange Act
Securities issued under Regulation A are not “restricted.” As a consequence, they are freely tradable, assuming a market exists. This will occur if the issuer lists the securities on a national exchange, thereby registering under Section 12 of the Exchange Act. The issuer will become subject to the requirements of the relevant stock exchange, as well as those applicable under the Exchange Act (e.g., periodic reporting, the Williams Act, the federal proxy rules, and the short-swing profits recapture rules).
Offerings qualified under Tier II of Regulation A may be registered under the Exchange Act through a simplified process. If the Tier II issuer makes the disclosures required of Form S-1 when filing Part II of Form 1-A, then the issuer need only file Form 8-A in order to list its securities on a national exchange, rather than the much more burdensome Form 10.
Broker-Dealer “Current Information”
Under Exchange Act Rule 15c2-11, broker-dealers must review information relating to an issuer when publishing quotations for certain over-the-counter equity securities. For Tier II companies filing periodic reports, the information published on EDGAR in connection with a Regulation A offering or as part of its ongoing reporting requirements satisfies the “current information” criteria under Rule 15c2-11, and broker-dealers may thus rely on it. Information satisfying Rule 15c2-11 does not constitute “current information” for purposes of Rule 144 and Rule 144A.
Bad Actor Disqualification
The bad actor disqualification provisions of Regulation A are similar to those in Rule 506 of Regulation D. Regulation A includes provisions for the disqualification of felons and other “bad actors” and has aligned its triggering events and covered person provisions with those found in Rule 506(d). Covered persons under Regulation A include managing members of limited liability companies, compensated solicitors of investors, underwriters, executive officers and other officers participating in the offering, and the beneficial owners of 20% or more of the issuer’s outstanding voting securities.
Coordination with State Securities Laws
Regulation A preempts state securities laws for offerings made under Tier II while preserving states’ rights to regulate Tier 1 offerings and to require notice of Tier II filings made with the SEC for fee collection or enforcement (anti-fraud) action.
Section 18(b)(4)(D) of the Securities Act enables the SEC to preempt state securities laws for offerings “offered or sold to a qualified purchaser.” The SEC may define what constitutes a “qualified purchaser” differently for different types of securities.
In Regulation A, the SEC defines “qualified purchaser” as either an accredited investor or an investor whose investment is limited to no more than 10% of the greater of his or her income or net worth for natural persons or 10% of the greater of annual revenue or net assets for non-natural persons. This definition, limited to Tier II offerings, has the effect of preempting state securities laws. Tier II offerings will remain subject to limited state securities oversight, which may include the investigation of fraudulent securities transactions and enforcement of related actions; the requirement that issuers file with the state copies of documents that were filed with the SEC and the assessment of associated fees; and the enforcement of suspension actions if filing fees are unpaid.
The avoidance of substantive “blue sky” regulation is expected to make Tier II an attractive option for many issuers. The Tier II definition of “qualified purchaser” does not apply to Tier I offerings.
Tier I issuers remain subject to state regulation and oversight.