By: Benjamin Jacob
What is REG A+ (An Overview)
Under United States’ securities law, several exemptions exist providing a pathway for private companies to fundraise without incurring the legal, compliance, and financial costs of a public offering.
This article examines offerings made pursuant to Regulation A+ including information about the origins of RegA+, offering requirements, and advantages/disadvantages.
Regulation A came to life via adoption in 1936 by the Securities and Exchange Commission (SEC) pursuant to Section 3(b) of the federal Securities Act of 1933 (“Securities Act”) as a registration exemption for certain small private stock issuances. Of note, up until 2012, usage of this exemption had been capped at $5 million.
From the congressional statutory 2012 Jumpstart Our Business (JOBS) Act came Regulation A+. The JOBS Act amended Section 3(b) of the Securities Act directing the SEC to proceed with modifying Regulation A (which we now know as Regulation A+) in order to provide an exemption for issuances up to $75mm. This ended a run of virtual non-use by private companies spanning nearly three decades which had resulted from the costly U.S. state by state Blue Sky securities compliance requirements involved in undertaking a Regulation A offering coupled with the $5 million offering limit.
Since 2015, when Regulation A+ went into effect, the exemption has grown into a viable alternative to a smaller-scale, registered IPO by removing Blue Sky requirements for certain offerings and increasing the proceeds that can be raised from $5 million to either $20 million or $75 million depending on the offering type.
The RegA+ Offering – Two Types
Regulation A+ has two types of offerings – Type 1 and Type 2. Both types of offering may include unaccredited investors though subject to limitations as noted below.
Tier 1 offering.
- A Tier 1 offering can raise up to $20 million within a 12 month period
- No limits on who can invest or how much can be invested
- Blue Sky securities regulatory compliance in every state in which securities will be sold is still required. In practice, this typically leads to companies confining the sale of securities to one or a small handful of states
Tier 2 offering.
- A Tier 2 offering can raise up to $75 million within a 12 month period
- There are limits on how much someone can invest if the offering will not be listed on a national securities exchange
- For individual unaccredited investors, limited to investing no more than 10% of their income or net worth
- For entity unaccredited investors, limited to investing no more than 10% of their revenue or net assets
- No limits for accredited investors
- Blue Sky securities regulatory compliance is not required in each state
Reg A+ offerings have become advantageous functioning in some ways as a “mini initial public offering” without the same costs as an IPO.
In exchange for complying with the strict required documentation involved, a Reg A+ offering provides key advantages including (but not limited to):
- Streamlined financial statement requirements that do not necessarily involve audit obligations
- More flexibility in the process as to how the offering is structured;
- Encourages retail investor participation and helps companies grow their cap table efficiently; and
- Less stringent reporting requirements while the company has less than 500 shareholders and $10 million in assets.
A Reg A+ offering is not without drawbacks and will not be the right offering type for every company. Careful attention and guidance from counsel and company advisors should be part of the process from early-on as the executive team develops its short-term and long-term capital-raising strategy. Some disadvantages of a Reg A+ offering include:
- Despite the streamlined financial disclosure requirements, RegA+ issuers must still file annual, semiannual, and current reports resulting in increased operating expenses.
- As noted above, Tier 1 offerings under Reg A+ do not preempt state law meaning companies must still comply with each state securities commission by registering or qualifying the offering prior to sale. Compliance with state securities laws tends to be expensive and prolong the process.
- A company issuing securities as a Reg A+ offering will become subject to Exchange Act reporting under Exchange Act Section 12(g) once it crosses certain shareholder or annual revenue thresholds.
- Data indicates that conducting a Reg A+ financing may create roadblocks to listing on a public exchange such as NYSE or NASDAQ as national securities exchanges have demonstrated skepticism of companies that have used Reg A+ based on the limited track record of satisfying comparable exchange requirements.
When considering a Reg A+ offering versus another offering, we strongly recommend consulting with legal counsel to formulate your overarching strategy factoring in your company’s industry and its short-term and long-term needs. The Fourscore team is available and happy to assist your company through this pivotal stage of growth.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.