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Regulation A: Comprehensive Guide For Issuers & Investors

Updated: Aug 31, 2023


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Regulation A (Reg A) is a crucial component of the US securities landscape that investors and issuers should be intimately familiar with. This regulation, issued under the United States Code (15 U.S.C. 77c, 77s), provides exemptions from registration requirements for public offerings of securities, under certain conditions. Notably, it covers two distinct tiers of offerings, each with its own set of requirements and limitations. This article aims to unpack these nuances and shed light on the essential aspects of Regulation A.


The exemption has most notably been used in recent years to launch a host of offerings to tokenized investment assets or allow everyday investors to own shares in startups. Reg A, alongside Regulation Crowdfunding (Reg CF) has largely pioneered the industry of equity crowdfunding in startups. Regulation A specifically has been used in allowing fractionalized investing in everything from collectibles and real estate to horses and NFTs.


Scope of Regulation A Exemption

At the heart of Regulation A is the provision for exemption under Section 3(b) from the Securities Act of 1933's registration requirements for public offer or sale of eligible securities (Rule 261). These are categorized into two tiers: Tier 1 and Tier 2 offerings.


Tier 1 Offerings

Tier 1 offerings include those where the aggregate offering price and aggregate sales do not exceed $20 million. This sum includes cash and non-cash considerations for the securities being offered and the gross proceeds for all securities sold under other offering statements within the 12 months before and during the current offering. Notably, affiliates of the issuer cannot offer more than $6 million.


Tier 2 Offerings

Tier 2 offerings, on the other hand, are those where the aggregate offering price and aggregate sales do not exceed $75 million, with not more than $22.5 million offered by all selling security holders that are affiliates of the issuer.


Investor Limitations

Similar to the cap on how much issuers can raise, there is also a cap on how much some investors can invest. If you are an accredited investor, there is no cap on how much you can invest in Reg A raises per year. However, non-accredited investors can only invest up to 10% of their net worth (excluding your house) OR annual income, whichever is greater.


Meaning if you make $50,000 per year with a $20,000 net worth, you may invest up to $5,000 per year. If you make $50,000 per year with a net worth of $90,000 per year, you can invest up to $9,000.


Requirements for the Issuer

The issuers of the securities are required to meet specific criteria. They must be entities organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with their principal place of business in the United States or Canada.


Other conditions include the issuer not being a development stage company with no specific business plan or purpose, not being an investment company as defined in certain sections of the Investment Company Act of 1940, not issuing fractional undivided interests in oil or gas or other mineral rights, not subject to any SEC orders under 12(j), has filed with the SEC all reports required to be filed, and is not disqualified under Rule 262.


Offering Conditions

Regulation A stipulates stringent conditions for the offer and sale of securities, with specifications for oral offers, written offers, and the requirement for offering statements to be filed with the Commission. The guidelines detail provisions for continuous or delayed offerings, and restrictions against 'at the market offerings.'


Offers

No offer of securities can be made until an offering statement is filed with the Commission. However, under "Test-the-waters" (TTW) provisions outlined in 230.255, issuers using Reg A can receive indications of interest provided they file the TTW materials used prior to filing their 1-A as an exhibit with the initial filing on their form 1-A and those materials have a disclosure stating:

  1. no money or other consideration is being solicited, and if sent, will not be accepted;

  2. no sales will be made or commitments to purchase accepted until the offering statement is qualified; and

  3. a prospective purchaser’s indication of interest is non-binding.

After filing but before the statement is qualified, oral offers, written offers, and solicitation of interests can be made. Written offers must meet the requirements of §230.254. Meaning written offers must bear the caption "Preliminary Offering Circular," the date of issuance, and the following disclosure (which must be highlighted or displayed prominently):

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular or the offering statement in which such Final Offering Circular was filed may be obtained.

After qualification, all written offers must accompany the most recent offering circular filed with the Commission.


Sales

No sale of securities can be made until the offering statement is qualified. For certain issuers, a Preliminary Offering Circular must be delivered at least 48 hours before the sale to anyone who had indicated interest in the offering.


The issuer can rely on the purchaser's representation for determining compliance with the ten percent investment limitation unless the issuer has knowledge that the representation is untrue. In sales by the issuer, underwriter, or dealer within 90 days of qualification, a Final Offering Circular must be delivered to the purchaser within two business days after the completion of the sale.


Continuous or Delayed Offerings

Continuous or delayed offerings can be made under this regulation, subject to certain conditions like the type of securities offered and the expected duration and amount of the offering.


Confidential Treatment

A request for confidential treatment can be made under Rule 406 for information required to be filed and Rule 83 for information not required to be filed.


Electronic Filing

All documents to be submitted to the Commission under this Regulation A must be electronically filed via EDGAR in accordance with the rules set out in Regulation S-T.

Understanding the Offering Statement


The Offering Statement

The offering statement comprises of the content required by Form 1–A and any other essential information that makes the mandatory statements complete and accurate, considering the context in which they are presented.


Paper, Printing, Language, and Pagination

Except where mentioned otherwise, the specifications for offering statements are identical to those in Rule 403 for registration statements under the Act. No fee is required upon the submission or filing of an offering statement on Form 1–A, or any changes to an offering statement.


Signatures

The issuer, its chief executive officer, chief financial officer, principal accounting officer, and a majority of its board of directors or other governing body, must sign the offering statement as prescribed by Form 1–A. If a signature is on behalf of someone else, proof of signing authority must be filed, unless signed by an executive officer for the issuer.


Non-public Submission

An issuer whose securities haven't been previously sold per a qualified offering statement under Regulation A or an effective registration statement under the Securities Act may submit a draft offering statement for non-public review by the Commission staff before public filing. The offering statement shall not be qualified less than 21 calendar days after the public filing with the Commission of:

  1. The initial non-public submission

  2. All non-public amendments

  3. All non-public correspondence submitted by or on behalf of the issuer to the Commission staff about such submissions

Qualification

An offering statement and any amendments can only be qualified at a date and time as determined by the Commission.


Offering Statement Amendments

Amendments must be signed and filed with the Commission in the same manner as the initial filing. Amendments must be filed under cover of Form 1–A and must be numbered consecutively in the order in which filed.


Financial Statement Amendments

Every amendment that includes revised audited financial statements must include the accountant's consent to use their certification with the revised financial statements in the offering statement or offering circular and to be named as having audited such financial statements.


Part III Amendments

Amendments solely relating to Part III of Form 1–A must comply with the requirements of paragraph (f)(1)(i) of this section. However, such amendments can be limited to Part I of Form 1–A, an explanatory note, and all of the information required by Part III of Form 1–A.


Post-Qualification Amendments

Post-qualification amendments must be filed under the following circumstances for ongoing offerings:

  1. At least every 12 months after the qualification date to include the financial statements required by Form 1–A as of that date.

  2. To reflect any facts or events that occur after the qualification date of the offering statement which represent a significant change in the information set forth in the offering statement.


The Offering Circular: An Additional Layer of Transparency

An offering circular must include the information required by Form 1–A for offering circulars.


Omitted Information

Certain details can be left out of a qualified offering circular. These details include things like the public offering price, information about underwriting, discounts or commissions, amount of proceeds, conversion rates, call prices, and other details that depend on the offering price, delivery dates, and terms of the securities.


However, you can only leave these details out if you meet the following conditions:

  1. The securities that are being offered are being sold for cash.

  2. The front cover of the offering circular has a genuine estimate of the maximum offering price range and the maximum number of securities being offered. Also, the price range can't be more than $2 for offerings where the highest price is $10 or less, or more than 20% if the highest price is over $10. And, the highest price in the range should be used when figuring out the total offering price.

  3. The offering statement isn't about securities being offered through competitive bidding.

  4. The total number of securities being offered can't be left out.

Information omitted from the offering circular under these circumstances must be filed with the Commission later.


Presentation of Information

Information in the offering circular must be presented in a clear, concise, and understandable manner. Repetition should be avoided, and cross-referencing within the document is allowed. The requirements for electronic medium distribution are also discussed. An offering circular must be dated approximately as of the date it was filed with the Commission.


Cover Page Legend

The cover page of every offering circular must prominently display the following disclaimer:


The United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.

Offering Circular Supplements

  1. If an offering circular includes information that was left out in previous versions based on Rule 253(b), it has to be submitted to the Commission within two business days. This should be done as soon as the offering price is determined or as soon as the circular is used for the first time after being approved for a public offering or sale.

  2. If an offering circular includes new or significantly changed information not covered in point 1, it has to be submitted to the Commission within five business days after it's first used for a public offering or sale. If the circular is just a supplement to a previously filed circular and doesn't have significant changes, then only the supplement needs to be submitted. However, the cover page of the supplement must show the date(s) of the related circular and any previous supplements, and together they make up the full offering circular.

  3. If an offering circular includes information covered in both points 1 and 2, it must be submitted to the Commission within two business days after the earlier of the determination of the offering price or when it's first used after being approved for a public offering or sale.

  4. If an offering circular isn't submitted within the deadlines specified in points 1 to 3, it must be submitted as soon as possible after realizing it hasn't been filed.

  5. Each submitted offering circular must include in the upper right corner of the cover page which parts (1 through 4) apply to the filing, and the file number of the offering statement the circular is related to.

Preliminary Offering Circular

As per § 230.254, the written offers of securities may be made post the filing of an offering statement and before its qualification, provided they satisfy certain conditions:


Outside Front Cover Page

The outside front cover page must contain the caption 'Preliminary Offering Circular,' the issuance date, and a legend that's prominently states:

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular or the offering statement in which such Final Offering Circular was filed may be obtained.

Other Contents

The Preliminary Offering Circular should contain almost all the information required by Form 1–A (§ 239.90), barring certain omissions allowed under Rule 253(b). The Preliminary Offering Circular is considered part of the offering statement and should be filed as such.


Solicitations of Interest and Other Communications

According to § 230.255, issuers or anyone authorized to act on their behalf may communicate with prospective investors before AND after the offering statement is filed with the SEC under Reg A. This is commonly referred to as a "test-the-waters" campaign. For anti-fraud purposes, these communications will still be deemed an offer.


Communications Under TTW

All communications before the qualification of an offering statement MUST:

  1. State that no money or other consideration is being solicited, and if sent in response, will not be accepted;

  2. State that no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is qualified, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date;

  3. State that a person's indication of interest involves no obligation or commitment of any kind; and

  4. After the public filing of the offering statement, state from whom a copy of the most recent version of the Preliminary Offering Circular may be obtained, including a phone number and address of such person; Provide the URL where such Preliminary Offering Circular, or the offering statement in which such Preliminary Offering Circular was filed, may be obtained; or Include a complete copy of the Preliminary Offering Circular.

These communications MAY include a link or other means by which the investor can express their interest and provide contact information once the offering statement has been qualified.


Reporting Requirements: Tier 1 and Tier 2

§ 230.257 details the reporting requirements for Tier 1 and Tier 2 offerings.


Tier 1 Offering

If a company has an approved Tier 1 offering, they need to submit an exit report (Form 1-Z) within 30 days after the offering ends.


Tier 2 Offering

Companies with an approved Tier 2 offering need to file different reports with the Commission:

  • Annual reports (Form 1-K) for the fiscal year in which the offering statement was approved and every year after. The filing deadline is mentioned in Form 1-K.

  • A special financial report (Form 1-K or Form 1-SA) if the offering statement didn't include audited financial statements for the latest fiscal year or unaudited financial statements for the first half of the current fiscal year.

  • Semiannual report (Form 1-SA) covering the first half of each fiscal year after the latest full-year financial statements included in the offering statement.

  • Current reports (Form 1-U) about specified matters within the timeframe mentioned in the form.

  • If a company that wasn't required to file reports merges with or takes over another company that was required to file reports, the first company has to start filing those reports.

  • If a company is already meeting the reporting requirements of Section 13 or 15(d) of the Exchange Act, they don't need to file additional reports under this rule.

  • Issuers of certain guaranteed securities or guarantors are exempt from these reporting requirements.

Amendments

Any changes to these reports have to be filed as amendments, clearly marked and only including the updated information.


Suspension of reporting duty

A company can stop filing reports if the securities are held by fewer than 300 (or 1,200 for a bank or bank holding company) people. This requires filing an exit report (Form 1-Z) and having filed all due reports before that. The suspension is not allowed under certain conditions related to Tier 2 offerings.


Termination of reporting duty

If a company meets the reporting requirements under the Exchange Act and then suspends or terminates its duty to file reports under the Act, the company's obligation to file reports under this section ends automatically or restarts, depending on eligibility and recent financial period covered.

Suspension of the Exemption

The Commission holds the power to temporarily suspend a Regulation A exemption in several circumstances. These include when:

  • No exemption is available, or terms of Regulation A haven't been complied with,

  • The offering statement contains a material misstatement or omission,

  • The offering violates section 17 of the Securities Act,

  • An event has occurred that would have rendered the exemption unavailable if it had occurred before filing the offering statement,

  • Any person outlined in Rule 262(a) is indicted or is the subject of a proceeding that falls under the character specified in Rule 262(a),

  • Any key player involved in the offering, such as the issuer, promoter, officer, director, or underwriter, fails to cooperate or obstructs an investigation by the Commission.

Without a hearing request, a suspension order becomes permanent on the 30th day and stays effective until it's modified or vacated by the Commission. However, if a hearing takes place, the Commission will decide whether to vacate the order or permanently suspend the exemption. The Commission may also impose a permanent suspension after providing a hearing opportunity for any reason that could've led to a temporary suspension order.


Withdrawal or Abandonment of Offering Statements

If no securities from an offering statement have been sold, and if such offering statement is not the subject of a proceeding under Rule 258, the offering statement can be withdrawn with the Commission's consent. The withdrawal application should state the reason for withdrawal and be signed by the issuer's authorized representative.


Abandonment of Offering Statements

The Commission may declare an offering statement or post-qualification amendment abandoned if it has been on file for nine months without any amendments or qualification. The nine-month period is counted from the date of the last amendment, if there were any.


Insignificant Deviations from Regulation A

A failure to comply with Regulation A won't result in the loss of the exemption if the person relying on the exemption can prove:

  • The compliance failure did not pertain to a term directly intended to protect the individual or entity in question,

  • The compliance failure was insignificant in the context of the overall offering,

  • A good faith and reasonable attempt was made to comply with Regulation A's terms, conditions, and requirements.

Actions by the Commission

A transaction made under Regulation A must comply with all applicable terms, conditions, and requirements of the regulation. The failure to comply is actionable by the Commission, even if the exemption is established by relying on this section.


Disqualification Events

Under § 230.262(a), a set of disqualification events are identified. These events prevent the availability of exemptions under Regulation A for a sale of securities if certain individuals or entities associated with the issuer have experienced these events.


Convictions

The first disqualification event, § 230.262(a)(1), covers convictions of any felony or misdemeanor within 10 years before the filing of the offering statement or such sale. This applies to issuers, their predecessors and affiliated issuers, and it encompasses convictions:

  • In connection with the purchase or sale of any security

  • Involving the making of any false filing with the Commission

  • Arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities

Court Orders

The second disqualification event, § 230.262(a)(2), pertains to orders, judgments, or decrees of any court of competent jurisdiction that restrain or enjoin the involved individuals from certain practices. This applies if the order was entered within five years before the filing of the offering statement or such sale.


Final Orders

Under § 230.262(a)(3), being subject to a final order of various regulatory bodies also disqualifies a person from the exemptions under Regulation A.


Commission Orders

Being subject to an order of the Commission entered pursuant to specific sections of the Securities Exchange Act of 1934 or the Investment Advisers Act of 1940 is the fourth disqualification event as per § 230.262(a)(4).


Anti-fraud Violations

The fifth disqualification event, under § 230.262(a)(5), refers to any order of the Commission ordering the person to cease and desist from committing or causing a violation or future violation of any scienter-based anti-fraud provision of the Federal securities laws.


Suspension or Expulsion

The sixth disqualification event, under § 230.262(a)(6), covers suspensions or expulsions from membership in, or association with a member of, a registered national securities exchange or a registered national or affiliated securities association for any act constituting conduct inconsistent with just and equitable principles of trade.


Filing Issues

The seventh disqualification event, under § 230.262(a)(7), refers to filing issues with the Commission, including refusal orders, stop orders, or orders suspending the Regulation A exemption.


Postal Service Orders

The final disqualification event, under § 230.262(a)(8), deals with being subject to a United States Postal Service false representation order or a temporary restraining order or preliminary injunction relating to alleged false representations.



*NOT LEGAL ADVICE. CONSULT A LAWYER FOR ANY LEGAL ADVICE OR LEGAL MATTERS RELATING TO REGULATION A*

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