Regulation A: The Public Offering Without the Full Weight

Two Tiers

Regulation A has two tiers.

Tier 1 permits offerings of up to $20 million in a twelve-month period. Tier 1 offerings are subject to review by state securities regulators in addition to the SEC, and they carry no ongoing SEC reporting obligation beyond an exit report.

Tier 2 permits offerings of up to $75 million in a twelve-month period. Tier 2 offerings preempt state registration requirements, but they require audited financial statements, ongoing reporting through annual, semiannual, and current reports, and, for non-accredited investors in offerings not listed on an exchange, a limit on the amount each investor may invest relative to income or net worth.

The Process

A Regulation A offering is made through an offering statement on Form 1-A, which includes an offering circular. The SEC staff reviews it and typically issues comments, much as it would for a registration statement. The offering statement must be qualified before sales are made. Companies may "test the waters" before and after filing, subject to rules about the content and legending of those communications.

When It Makes Sense

Regulation A can make sense for a company with a genuine community of customers or supporters who want to invest, a story that can be told directly to the public, and the discipline to handle ongoing reporting. It can also serve as a step toward becoming a public company, since Tier 2 securities can, with the right planning, be positioned for quotation or, with additional steps, exchange listing.

Where It Disappoints

The most common disappointment is not legal. It is commercial. Qualification does not create investors. A company that qualifies an offering without a realistic plan to reach buyers, and a realistic budget for doing so, may find that it has spent heavily to raise very little.

The second disappointment is liquidity. Qualification under Regulation A does not by itself create a trading market. Chapter 9 explains why a ticker requires more than an effective filing, and that explanation applies here as well.

The third is ongoing obligation. A Tier 2 issuer has reporting responsibilities that continue after the money is raised. Companies should budget for them from the beginning.

The Marketing Rules Still Apply

Because Regulation A permits general solicitation, companies sometimes treat their offering campaigns as ordinary marketing. They are not. Every statement made to promote the offering is a statement made in connection with the offer of securities. Chapter 3 applies in full. Paid influencers, social media campaigns, and video testimonials all need review, and the offering circular must remain consistent with what the marketing says.