Regulation A+ (“Reg A+”) is a framework for capital-raising that was created under Title IV of the JOBS Act and subsequently implemented by the Obama administration in 2015. It differs from other capital-raising methods—such as angeling, venture capital, and initial public offerings (“IPOs”)—in several noteworthy ways.
For companies wishing to sell public securities (e.g., stocks, convertible notes, etc.), the Securities Act of 1933 imposes a litany of registration and reporting requirements that can prove to be onerous and expensive, especially for small, mid-market, or emerging growth companies with limited resources. Therefore, there exist several offering exemptions that enable companies to raise funds without incurring the financial expense and time-consuming burden of fully reporting to the Securities and Exchange Commission.
Most private company financings rely on Regulation D or Regulation S exemptions. However, these exemptions come with a number of restrictions, including accredited investor requirements and a general prohibition against “public solicitations” (i.e., advertising the sale of securities and soliciting investment from the general public).
Reg A+ is a relatively recent exemption that allows companies to raise up to $50 million in capital from the general public, with much lighter reporting obligations than those of a traditional IPO—though the offering must meet certain requirements to qualify for the Reg A+ exemption. After March 15, 2021, companies will be permitted to raise up to $75 million in a Reg A+ offering.
Reg A+ offerings are a flexible tool. For private companies, Reg A+ offerings can facilitate a going-public listing on the NASDAQ/NYSE or on over the counter (“OTC”) markets, incurring fewer expenses and with greater efficiency than a traditional IPO. For public companies, Reg A+ offerings can be used in conjunction with up-listing or simply to raise capital efficiently.
Additionally, Reg A+ offerings allow issuers to “test the waters” by conducting publicity campaigns and soliciting indications of interest from the public to assess the level of market interest before officially launching an offering. This is intended to help businesses decide whether to proceed with the offering or not.
Reg A+ also significantly expands the pool of potential investors for an offering by allowing investments from non-accredited investors—though there are limits on how much a non-accredited investor may invest in a Reg A+ offering in a Tier 2 offering (more on that below). Historically, many public security offerings have been restricted to accredited investors only, defined as either (i) an entity or person whose income exceeds $200,000 or whose joint income with a spouse exceeds $300,000; or (ii) an entity or person whose individual/joint net worth with a spouse exceeds $1 million.
The accredited investor criteria have often limited certain investment opportunities to a smaller pool of wealthy investors, whereas Reg A+ allows for investments by a much larger range of constituents. This is good news for small and mid-market companies who will likely benefit from an enlarged investor pool.
Reg A+ offerings are available to U.S. and Canadian companies, both private and public. There are a few disqualifying criteria, namely that a company cannot participate in a Reg A+ offering if:
(i) the company is a “blank check company,” defined as a development stage company that either has no specific business plan or purpose, or has indicated that its business plan is to merge with or acquire an unidentified company or companies
(ii) the company is 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) the company is 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.)
For those companies that do qualify, Reg A+ offerings can be an excellent opportunity to raise funds in a cost-efficient manner. While Reg A+ offerings are particularly suited to real estate developers and owners, start-ups, and emerging growth companies, they are also ideal for more mature mid- and late-stage businesses. Reg A+ gives these companies a more sophisticated tool with which to raise meaningful capital, while reducing the burdensome costs and stringent requirements typically enforced by the SEC.
So far, the real estate industry has been the most prolific in using Reg A+, with other industries beginning to follow suit. Examples of companies that have used Reg A+ offerings effectively include Elio Motors (an autocycle start-up) and Fundrise (a real estate investment platform).
To begin a Reg A+ offering, a company must first file an offering statement with the SEC (Form 1-A), also called an “Offering Circular.” The filing needs to be completed electronically on the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR), so that the SEC can review and comment before qualifying the statement. For companies using Reg A+ for the first time, they have the option to submit a confidential offering statement for SEC review, as long as these documents are publicly filed no later than 21 days before qualification.
It is important to note that during any time prior to the Offering Circular’s filing or qualification by the SEC, the business is allowed to make oral offers, written offers, and other solicitations of interest in order to assess the offering’s viability (aka the “test the waters” period). However, actual sales or commitments to buy securities cannot be made until after the Offering Circular is officially qualified by the SEC.
Once the offering has been completed, the issuer will be required to report to the SEC to the extent indicated by the offering’s categorization as either a “Tier 1” or “Tier 2” offering—though in either case, the reporting obligations will be considerably lower than the requirements for a public company.
A Tier 1 Reg A+ offering allows the issuer to raise between $0 and $20 million in a 12-month period, with no restrictions on investments from non-accredited investors. Another benefit of Tier 1 is that the financial statement that must be filed as part of the Offering Circular doesn’t have to be audited, nor does the issuer have to follow an ongoing reporting regime—the issuer need only file a single exit report 30 days after the offering closes. Tier 1 does require the issuer to remain compliant with state “Blue Sky” laws however (i.e., state-level anti-fraud regulations that require specific registrations and disclosures). Issuers must register and comply with all states from which they accept investors, which can be burdensome for any issuer raising capital from investors in multiple states.
A Tier 2 offering allows the issuer to raise between $0 and $50 million in a 12-month period. Tier 2 does impose a limit on investments from non-accredited investors, stipulating that non-accredited investors can only invest a maximum of 10% of their total income/net worth. Tier 2 also requires financial statements to be audited and prescribes a much more robust reporting regime, including annual and semi-annual reports made to the SEC. Despite this, the absence of the Blue Sky laws registration requirement, coupled with the higher fundraising limits, makes Tier 2 the more popular Reg A+ offering. Again, the $50 million limit will increase to $75 million on March 15, 2021.
Reg A+ requires experienced counsel and is most effective if conducted through a qualified platform and investment banker/broker-dealer. Reg A+ offerings can be hosted on capital-raising platforms (such as Republic, Manhattan Street Capital, Dalmore, etc.) or directly on an issuer’s site, with the appropriate disclosures. Using a hosting site or a broker-dealer can give a company the advantage of greater exposure for its offering, while also outsourcing the logistics of the fundraising itself.
A trusted attorney can assist a company in determining if a Reg A+ offering will be beneficial, as well as which tier would be best for the issuer. We can also work to help prepare the Offering Circular and advise issuers regarding the fulfillment of requirements during each stage of the offering cycle. Auditors, accountants, and underwriters may also be brought into the process, as needed.