Regulation A: “Mini” Public Offerings Provide Capital Raising Options

Banks and other sources of traditional debt financing are offering rates that may not be attractive to borrowers, while private equity investors are becoming more selective in the opportunities they pursue. Regulation A under the Securities Act of 1933 offers companies seeking funding an additional option to consider in what is essentially a “mini” public offering. We have set out below some of the frequently asked questions and answers regarding Regulation A.

What is Regulation A?

Regulation A is a set of rules adopted by the SEC to provide an exemption from registration for certain securities offerings under the Securities Act. Due to limitations on the SEC’s rulemaking authority, when originally adopted, Regulation A only allowed an exemption from registration for offerings that did not exceed $5 million in the aggregate during any 12-month period. Since the original rules were adopted, the SEC has adopted various amendments to Regulation A that greatly increase the maximum offering size to up to $75 million for qualified issuers and otherwise make Regulation A an attractive capital raising alternative for eligible companies.

Who is Eligible to Use Regulation A?

Regulation A is generally available to issuers that are organized and have their principal place of business in either the United States or Canada. Certain types of companies are ineligible to use Regulation A, including:

• Investment companies and business development companies, as defined under the Investment Company Act of 1940.
• Public companies that have not complied with all reporting requirements under the Securities Exchange Act of 1934 during the two-year period prior to the Regulation A offering.
• Issuers who have failed to file reports required in connection with a prior Regulation A offering.
• “Blank check” companies formed with no specific business plan or purpose or whose only business plan is to engage in a merger or acquisition with an unidentified company or companies (although, note that non-operating “shell companies” are eligible to use Regulation A).
• Those disqualified under Regulation A’s “bad actor” provisions, which are similar to those that apply in offerings under Regulation D.

Who Can Invest in a Regulation A Offering?

Regulation A offerings are split into two different tiers based on the size of the offering. Tier 1 offerings cannot exceed $20 million during any 12-month period, while Tier 2 offerings cannot exceed $75 million during any 12-month period. Unlike private offerings made under Regulation D, which can limit the number of non-accredited investors participating, offerings under Regulation A are open to any number of accredited and non-accredited investors; although, non-accredited investors participating in Tier 2 offerings are subject to an individual investment cap based on annual income, net worth, annual revenue or net assets, depending on whether the investor is a natural person or not. This flexibility as to participants, along with the ability to widely market Regulation A offerings, allows greater access to potential investors than more limited offerings under Regulation D.

What are Other Benefits of a Regulation A Offering?

Regulation A offerings offer various other benefits as compared to other available exempt offerings, particularly those under Regulation D, including:

• Flexibility in offering debt, equity or a combination of both, including via continuous or delayed “shelf” offerings.
• The ability to engage in general solicitation and advertising activities relating to the offering, including online.
• Subject to certain conditions, issuers can communicate with investors to solicit indications of interest, even before filing the necessary Form 1-A and offering circular for the offering, allowing issuers to “test the waters” in ways that are typically not allowed in traditional IPOs.
• The securities sold in Regulation A offerings are not restricted securities for federal securities law purposes, meaning they are freely tradable by non-affiliates of the issuer, although certain state securities laws may still apply, particularly for Tier 1 offerings.

What are the Filing and Reporting Requirements Under Regulation A?

The primary filing required in connection with a Regulation A offering is an offering statement on Form 1-A. Filed with the SEC, Form 1-A includes information about the securities being offered, as well as the issuer and its business operations and financial condition. While less involved than a full-fledged IPO registration statement, Form 1-A nonetheless requires a detailed description of the issuer and its business, including two years of financial statements (which must be audited in connection with a Tier 2 offering), as well as various exhibits, including the issuer’s organizational documents and material contracts.

Once filed, Form 1-A is subject to review and comment by the SEC, and no sales of securities can be made until Form 1-A is qualified, although “testing the waters” communications can still be made during the pre-qualification period if certain requirements are met.

After the Regulation A offering is completed, a Tier 1 issuer must file an exit report but otherwise has no further reporting obligations. Tier 2 issuers, however, have ongoing annual, semi-annual and current reporting requirements that are similar to those required of other public reporting companies.

Is Regulation A Right for Your Business?

Regulation A offers a method for companies to access capital through the public markets with a reach and scope beyond that of private offerings under Regulation D. While the initial and ongoing reporting requirements would impose an additional burden on most issuers, these requirements are nowhere near as burdensome as those associated with a traditional IPO process. Companies that are finding traditional sources of capital difficult to access should consider whether a Regulation A offering is a good fit for their needs.

For additional information and assistance in determining whether a Regulation A offering is right for your business, please contact Matthew M. McDonald at mmmcdonald@klehr.com.

Author Matthew M. McDonald is a partner in the Corporate & Securities Department at Klehr Harrison.