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The Regulation A Exemption
Overview of Regulation A
Regulation A is described in the SEC’s Rules 251 through 263, and provides an exemption from the securities registration requirements of the Securities Act of 1933, on the grounds that a smaller securities issuance does not warrant registration. Regulation A allows exemption from registration if the offering is no larger than $5 million in aggregate per year. Of this amount, no more than $1.5 million can be attributed to the secondary offering of securities currently held by existing shareholders; the secondary offering cannot include resales by company affiliates if the company has not generated net income from continuing operations in at least one of the past two fiscal years. The exemption is restricted to American and Canadian companies, and it is not available to investment and development-stage (such as “blank check” companies) companies. Anyone using this exemption must also create an offering circular, similar to the one that would be required for a registered offering.
Advantages of Regulation A
There are a number of critical advantages to the exemption provided under Regulation A. First, there is no limit on the number of investors, nor must they pass any kind of qualification test (as would be the case under Regulation D). Further, there are no restrictions on the resale of any securities sold under the Regulation. Finally, the key difference between a Regulation A offering and a registered offering is the absence of any periodic reporting requirements. This is a major reduction in costs to the company, and is the most attractive aspect of the exemption.
In addition, and unlike a registered offering, the Regulation allows a company to “test the waters” with investors in advance of the offering, in order to determine the level of investor interest. To take advantage of this feature, the company must submit the materials used for this initial testing of the waters to the SEC on or before their first date of use. The materials must state that no money is being solicited or will be accepted, that no sales will be made until the company issues an offering circular, that any indication of interest by an investor does not constitute a purchase commitment, and also identify the company’s CEO, as well as briefly describe the business. The company can only “test the waters” until it has filed an offering circular with the SEC, and can only commence securities sales once at least 20 days have passed since the last document delivery or broadcast.
Registering Under Regulation A
When a company is ready to notify the SEC of securities sales under this Regulation, it does so using Form 1-A. Once the Form is filed, the company can conduct a general solicitation, which can include advertising the offering, as long as the solicitation states that sales cannot be completed until the SEC qualifies the company’s preliminary offering circular. This preliminary document does not have to include the final security price, though it should contain an estimate of the range of the maximum offering price and the maximum number of shares or debt securities to be offered. Advertising can only state where the offering circular can be obtained, the name of the company, the price and type of security being offered, and the company’s general type of business.
While a company is permitted to advertise its offering as soon as the Form 1-A is filed, it must follow a specific procedure to conduct actual security sales. Once the Form 1-A has been qualified by the SEC, the company must furnish an offering circular to each prospective purchaser at least 48 hours prior to mailing a confirmation of sale. If a broker/dealer is involved with the sale, this entity must provide a copy of the offering circular either with or prior to the confirmation of sale.
If the information in an offering circular becomes false or misleading due to changed circumstances or there have been material developments during the course of an offering, the company must revise the offering circular.
Ongoing Regulation A Filings
Once securities sales are underway, the company must file Form 2-A with the SEC every six months following the qualification of the offering statement, describing ongoing sales from the offering and use of proceeds. In addition, it must file a final Form 2-A within 30 calendar days following the later of the termination of the offering or the application of proceeds from the offering.
Disqualifying Under Regulation A
The Regulation has provisions that can disqualify a company from using it. It is not available if a company has had a variety of disclosure problems with the SEC in the past five years, or if the company currently has a registration statement being reviewed by the SEC, or if any affiliates or the company’s underwriter have been convicted within the past 10 years of a crime related to a security transaction.
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Related Topics
Form S-1
Form S-8
The initial public offering
Listing on a stock exchange
The shelf registration