Reg A+ is a framework for capital-raising that was created under the JOBS Act and subsequently implemented by the Obama administration in 2015. The framework is meant to provide a more cost-effective means of raising capital for companies wishing to avoid the hefty expenses, resources, and reporting obligations typically required under the Exchange Act when selling public securities. While Reg A+ offerings can function similarly to a traditional IPO, they allow for greater flexibility when it comes to gauging public interest in the company’s securities and the types of investors allowed to purchase those securities. As of March 15, 2021, Reg A+ rules allow companies to raise up to $75 million in a 12-month period.
Reg A+ offerings are available to U.S. and Canadian companies, both private and public. The following companies are not eligible to use Reg A+, however:
(i) “blank check companies”; defined as development stage companies that either have no specific business plan or purpose, or have indicated that their business plan is to merge with or acquire an unidentified company or companies
(ii) companies required to be registered under the Investment Company Act of 1940 (this mostly applies to companies whose primary functions are investing, reinvesting, and trading in securities)
(iii) companies disqualified under a “bad actor” rule ( e.g., if the issuer or other related parties have received criminal convictions, court injunctions, SEC disciplinary orders, etc.)
Reg A+ allows for equity securities, debt securities, and securities that are convertible or exchangeable into equity interests, as well as guarantees of these securities. Reg A+ specifically excludes asset-backed securities, as defined by 17 CFR § 229.1101(c).
Issuers must choose whether they want to conduct their offerings under Tier 1 or Tier 2 of Regulation A+. While the two tiers share several similarities, the chart below outlines the major differences between the two frameworks.
Major Differences: Tier 1 vs. Tier 2 Offerings
To begin a Reg A+ offering, a company must first file an offering statement with the SEC via Form 1-A. The filing needs to be completed electronically on the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR). After the SEC reviews and qualifies the offering, companies may then begin selling securities. For companies using Reg A+ for the first time, they are allowed to submit a draft offering statement for confidential review by SEC staff, as long as this non-public draft is publicly filed no later than 21 days before qualification. Once an offering has been qualified, the issuing company will receive a notice of qualification from the SEC’s Division of Corporation Finance.
Before qualification, issuers are permitted to engage in a “test the waters” period to gauge public interest in the prospective offering. This differs from the rules for traditional IPOs which enforce a pre-offering “Quiet Period” during which general public solicitation is prohibited.
Under Reg A+, however, issuers can solicit interest from the general public through written and oral communications at any time, as long as any solicitation materials are submitted along with the offering statement and updated as needed. For issuers conducting an offering under Tier 1, solicitation materials and the “test the waters” period as a whole will be subject to individual states’ securities laws. It’s also important to note that issuers cannot accept actual payments or commitments for future payments during the “test the waters” period. Actual sales of securities may only commence once the offering has been officially qualified by the SEC.
While not a requirement, Reg A+ offerings are most effective if conducted through a qualified intermediary—either a broker-dealer or a funding portal. A broker-dealer provides a much more hands-on facilitation of the sale of securities and is legally held to higher standards of due diligence. A broker-dealer can offer investment advice, solicit the purchase of securities, compensate others for solicitation, and manage the securities themselves. However, broker-dealers’ fees can be quite expensive, which often leads them to reject capital raises below a certain price point.
Funding portals, on the other hand, are a relatively new capital-raising mechanism created under the JOBS Act that are well-suited to smaller capital raises. Funding portals allow potential investors to browse investment opportunities and purchase securities via an online funding platform. While a funding portal cannot perform the broker-dealer functions mentioned above, it can be a more cost-effective, streamlined means through which a company conducts its offering.
Both broker-dealer firms and funding portals are required to be registered with the SEC and be a member with the Financial Industry Regulatory Authority (FINRA). The FINRA website provides a list of the firms and funding portals that it currently regulates. That being said, a great many of these fundraising firms and platforms exist, which can make it difficult to decide which is right for you and your business. Experienced counsel familiar with the Reg A+ funding landscape can help you to select the appropriate funding platform based on your fundraising goals, business type, and target audience. In most cases, if your counsel is active in the Reg A+ space, they may be able to connect you directly with a funding platform.
An accredited investor is an investor that meets certain standards that qualify it as financially sophisticated and stable enough to bear the risks of purchasing unregistered securities. A business entity is considered accredited if it has over $5 million in assets or if its equity owners are accredited individuals. For an individual to be considered an accredited investor, they must meet one of the following criteria:
(i) have an annual income exceeding $200,000 for at least the last two years
(ii) have a joint annual income with a spouse exceeding $300,000 for at least the last two years
(iii) have an individual or spousal joint net worth exceeding $1 million
While Tier 1 offerings do not impose limits on investments from non-accredited investors, Tier 2 stipulates that non-accredited investors may only invest a maximum of 10% of their total income or net worth (whichever is higher). However, this Tier 2 limit does not apply if the securities are going to be listed on a national securities exchange once the offering closes. (See #13).
Both Tier 1 and Tier 2 offerings require financial statements going back at least two fiscal years or since the company’s inception if the business is less than two years old. However, only statements under Tier 2 offerings must be professionally audited. Companies conducting Tier 2 offerings must provide financial statements independently audited according to generally accepted auditing standards (GAAS) in the U.S. or the standards set forth by the Public Company Accounting Oversight Board (PCAOB).
For Tier 1 offerings, there is no ongoing reporting regime. Issuers are simply required to file an exit report (Form 1-Z) no later than 30 days after the offering closes. Issuers conducting Tier 2 offerings must file both annual (Form 1-K) and semi-annual (form 1-SA) reports on an ongoing basis, as well as current event reports (Form 1-U) whenever certain changes to the business occur, such as:
Note that the reporting requirements above do not apply if the issuer decides to list on a national securities exchange (see #13). In such a case, the issuer would become subject to the full reporting regime required for public companies on that exchange.
Yes, Reg A+ stock is freely tradeable as a matter of law. Securities purchased by non-affiliates of the issuer become liquid upon issuance and are freely tradeable with no transfer restrictions. For companies not listed on the NYSE or NASDAQ, securities can be traded on over-the-counter markets such as the OTCQX or OTCQB and still maintain good liquidity.
Yes. An issuer who has engaged in a Tier 2 offering may subsequently file Form 8-A in order to list its securities on a national securities exchange such as the NYSE or NASDAQ. Thereafter, the issuer will be subject to the full reporting regime required for public companies under the Exchange Act. In recent years, many companies have chosen to make their initial public offerings via Reg A+ because of the reduced legal and audit fees, the quicker processing time, the option to set a zero minimum for the offering, and the immediate liquidity that Reg A+ provides to investors. While companies are allowed to go public via Reg A+, they are not required to.
Under the Reg A+ integration safe harbor, current offerings cannot be integrated with any prior offers or sales. As for subsequent offers and sales of securities, these cannot be integrated with current offerings if they are:
(i) registered under the Securities Act (except as provided in Rule 255(e), which deals with abandoned offerings);
(ii) exempt from registration under Rule 701, which deals with sales of securities pursuant to certain compensatory benefit plans;
(iii) made pursuant to an employee benefit plan;
(iv) exempt from registration under Regulation S;
(v) made more than 6 months after the completion of the Reg A+ offering; or
(vi) exempt from registration under Section 4(a)(6) of the Securities Act aka the “crowdfunding exemption.”