Regulation A for Issuers
Regulation A is sometimes called a mini-IPO. A company files an offering statement on Form 1-A, the SEC staff reviews it and qualifies it, and the company can then sell to the general public. Tier 1 allows up to $20 million in 12 months with state review. Tier 2 allows up to $75 million, preempts state review, requires audited financials and ongoing reporting, and limits non-accredited investors to 10 percent of the greater of income or net worth unless the securities are listed.
Tier 1 vs Tier 2
| Tier 1 | Tier 2 | |
|---|---|---|
| Raise limit, 12 months | $20 million | $75 million |
| State review | Required in each state of sale | Preempted |
| Financial statements | Unaudited generally permitted | Audited |
| Ongoing reporting | Limited | Annual, semiannual and current reports |
| Non-accredited investor cap | None | 10 percent of the greater of income or net worth, unless listed |
The process
- Prepare the offering circular and audited or unaudited financials as the tier requires.
- File Form 1-A with the SEC, with or without confidential initial review.
- Respond to staff comments.
- Receive qualification from the SEC, and state clearance in Tier 1.
- Sell to investors and file ongoing reports as required.
Who cannot use it
- Companies organized outside the United States and Canada.
- Companies subject to Exchange Act reporting requirements.
- Investment companies, including most private funds.
- Blank check companies and certain others.
- Issuers disqualified under the bad actor rules.
What the offering circular covers
The offering circular is the disclosure document, similar in spirit to a prospectus. It describes the business, management, use of proceeds, risk factors, the securities offered and the financial statements. The SEC staff reads it and comments, and the issuer revises until the staff is satisfied. Because the circular is public, anything in it can be used by investors, competitors and regulators, so accuracy and completeness matter.
Testing the waters
A Regulation A issuer may gauge investor interest before filing, through communications that comply with the rules, without violating the prohibition on offers before qualification. This is a major difference from a Rule 506(b) offering, which cannot use general solicitation. The flexibility makes Regulation A attractive for businesses with a consumer or public following.
When Regulation A fits
It fits an operating company or a real estate company that wants to sell to the public, including non-accredited investors, and can bear audit costs and SEC review. It is slower and more expensive than Rule 506, so it makes the most sense when the audience is retail. See Regulation Crowdfunding and Rule 506 for alternatives.
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Book Free ConsultationFrequently asked questions
Is Regulation A the same as an IPO?
No, though it is often called a mini-IPO. It involves SEC qualification but lighter requirements than a full registration.
Can real estate companies use it?
Yes, if they are not investment companies and meet the other eligibility rules.
Does Regulation A override state law?
Tier 2 does. Tier 1 offerings must go through state review.
Do I need an audit?
Tier 2 requires audited financials. Tier 1 generally does not.