Securities Law: An Overview of Regulation A+
Regulation A+ is an update to a underutilized securities exemption that provides a new way for companies to raise money from investors. Before we go into the details of Regulation A+, we’ll cover some background information to provide a bit of context about securities regulations in general.
The General Rule
The general rule in the United States is that in order to sell an ownership interest in your company, you have to register the sale (or “offering”) with the Securities and Exchange Commission (the SEC). The registration process, commonly called an initial public offering (or IPO), is expensive and time consuming. An IPO is so expensive that generally only the largest companies go public. To be worth the cost, it generally only makes sense to pursue an IPO if you are raising upwards of $50-100 million, and even then the costs can be prohibitive in some circumstances.
The Common Exemption
Luckily, the SEC has provided several exemptions from registration that allow companies to raise money from investors in a more timely and cost-controlled manner. The most commonly used exemption is under Rule 506, using either Rule 506(b) or Rule 506(c).
Both Rule 506(b) and Rule 506(c) allow companies to raise an unlimited amount of money. But for practical purposes, the money must come exclusively from accredited investors (in theory, you could have up to 35 unaccredited investors, but then you’d have to meet additional IPO-level disclosure requirements, which generally defeats the purpose of Rule 506 in the first place). And for both versions of Rule 506, state law is preempted—meaning you don’t have to worry about complying with 52 different “states” rules related to the sale.
The difference between Rule 506(b) and Rule 506(c) is that with 506(c) you can advertise your offering. With 506(b) there is a prohibition on general solicitation (lawyer speak for: you can’t advertise). The trade-off is that with 506(c) you have to take extra steps to verify that all of your investors are accredited investors (and under Rule 506(C) you couldn’t even theoretically accept money from unaccredited investors).
Regulation A is something in between an IPO and a Rule 506 offering. Regulation A (as opposed to Regulation A+) has been in existence for a long time, but for a few reasons it has hardly been used: First, Regulation A had a $5 million dollar limit—you could only raise up to $5 million dollars per 12 months. Second, you had to pre-file disclosure documents with the SEC, and you had to wait to get their approval to move forward with the offering. This made it more expensive and more time consuming than a Rule 506 offering, which had no equivalent pre-offering requirements. Third, unlike Rule 506, Regulation A did not pre-empt state securities laws. This meant you’d still have to comply with state-specific registration requirements in each state where you had an investor.
Two of the few appealing things (from a company’s perspective) about Regulation A were that it allowed for investors to sell securities to unaccredited investors, and it allowed the company to advertise the stock offering.
As part of the JOBS Act, Congress overhauled Regulation A, and the new rules are commonly referred to as Regulation A+.
Regulation A+ now has two tiers—conveniently called Tier I and Tier II. Before we get in to the differences between the two tiers, we’ll address some of the similarities. First, both tiers (as well as the original Regulation A) provide that the securities issued under Regulation A are not restricted. This means that people who buy shares of stock in a Regulation A offering are not subject to restrictions against reselling their stock. (Stock sold under 506 has resale restrictions.) Second, issuers may “test the waters” and see if there is interest in the securities being offered prior to getting the SEC’s approval to move forward with the offering. Third, the SEC has a confidential review process, whereby it will review the offering without publicly disclosing the documents being reviewed. However, the documents must be publicly disclosed for 21 days before the company can issue shares under Regulation A+. Last, under both tiers a company may advertise and sell securities to unaccredited investors.
Offerings made under Tier I of Regulation A+ can raise up to $20 million. The disclosure requirements for Tier I offerings are not as substantial. Notably there is no requirement for companies to disclose audited financial statements. And there are no significant on-going reporting obligations. Tier I offerings do not preempt state law.
Offerings made under Tier II of Regulation A+ can raise up to $50 million, and Tier II offerings preempt state law. But, Tier II offerings have on-going reporting obligations. This means that even after the offering is initially ok’d by the SEC, the company will still have to file yearly and half-yearly reports with the SEC. Tier II offerings also have more burdensome initial disclosure requirements, including the filing and disclosure of audited financial statements.
Regulation A+ might be an interesting option for companies looking to sell securities to unaccredited investors. However, it’s tough to beat 506 offerings, which allow for companies to raise an unlimited amount with less extensive disclosures and no on-going reporting requirements.
If you’d like to learn more about raising money for your company, including offerings under Regulation A+, please contact us today.