Regulation A

Regulation A, often referred to as “Reg A,” is a set of rules under the JOBS Act that allows small and medium-sized companies to raise capital from the public with a simplified process compared to traditional initial public offerings (IPOs). This regulation, governed by the Securities and Exchange Commission (SEC), aims to make it easier for smaller companies to access funding while still providing investor protection. Reg A offerings are often considered a middle ground between private placements and public offerings, offering more flexibility and fewer regulatory hurdles.

Definition

Regulation A is an exemption from registration for public offerings, meaning that companies can sell their shares to the general public without the need to undergo the full SEC registration process that is typically required for an IPO. The key features of Reg A offerings include:

• Public Offering: Unlike private placements that are restricted to accredited investors, Reg A allows companies to solicit investments from the general public.
• Simplified Reporting: Companies conducting Reg A offerings face less stringent reporting requirements compared to those conducting a traditional IPO.
• Testing the Waters: Before formally filing with the SEC, companies can solicit interest from potential investors to gauge market demand.

Update

The SEC periodically updates the rules governing Regulation A to make it more attractive for smaller companies and to protect investors. One significant update came in March 2021, when the SEC increased the maximum offering size under Tier 2 from $50 million to $75 million. This update was part of broader changes aimed at facilitating capital formation while maintaining important investor protections.

Documentation

To conduct a Regulation A offering, companies must prepare and file several documents with the SEC:

1. Offering Circular: This is the primary disclosure document and is similar to a prospectus used in a traditional IPO. It includes information about the company’s business, management, financial statements, and the terms of the offering.

2. Form 1-A: This form is the application for a Regulation A offering. It includes the offering circular and other required information, such as the use of proceeds, legal matters, and any exhibits or schedules.

3. Financial Statements: Depending on the tier under which the offering is conducted, the financial statements must be either reviewed or audited by an independent accountant.

4. Periodic Reports: Companies conducting a Regulation A offering are required to file ongoing reports with the SEC, which may include annual and semi-annual reports (for Tier 2 offerings) and current event reports.

Tiers

Regulation A offerings are divided into two tiers, each with different requirements and limitations:

Tier 1

• Offering Limit: Up to $20 million in a 12-month period.
• Investor Limits: No investment limits for individual investors.
• Disclosure Requirements: Requires financial statements that are reviewed (but not audited) by an independent accountant.
• State Securities Laws: Subject to state securities law registration and qualification requirements, also known as “Blue Sky” laws.
• Ongoing Reporting: Less frequent reporting requirements compared to Tier 2, no ongoing reporting to the SEC after the offering is completed.

Tier 2

• Offering Limit: Up to $75 million in a 12-month period.
• Investor Limits: Non-accredited investors cannot invest more than 10% of their annual income or net worth, whichever is greater.
• Disclosure Requirements: Requires financial statements that are audited by an independent accountant.
• State Securities Laws: Exempt from state Blue Sky laws, making it easier to conduct offerings across multiple states.
• Ongoing Reporting: More rigorous ongoing reporting requirements, including annual reports on Form 1-K, semi-annual reports on Form 1-SA, and current event reports on Form 1-U.

Companies Utilizing Regulation A

Several companies have taken advantage of Regulation A to raise capital. Notable examples include:

• Elio Motors: An American automotive startup that used a Reg A+ offering to raise over $17 million for the development of its three-wheeled vehicle.
• StartEngine: A crowdfunding platform that allows startups to raise capital through Reg A offerings. (https://www.startengine.com)

By providing a streamlined process for raising capital from the public, Regulation A serves as a valuable tool for companies looking to grow while maintaining a level of investor protection mandated by the SEC.