The Regulation A exemption

Regulation A allows for a limited amount of fund raising in exchange for reduced reporting requirements. This approach is used when a business does not wish to go public to raise capital.

Under Regulation A, a company is limited to raising no more than $5 million per year (though this has just been raised to $50 million under the Jumpstart Our Business Startups Act). Also, there is no limit to the number of investors who can buy the company’s stock, and none of these investors need to be classified as accredited investors. Further, the company is not required to file any ongoing reports with the SEC. Finally, the shares sold under Regulation A are not restricted. The lack of a stock restriction should eliminate the need for any price discounts to investors, or the issuance of warrants. However, any company using this exemption is presumably so small that the market for its shares is microscopic, which means that investors will still have a difficult time selling their shares.

Of the maximum amount that can be raised, $1.5 million can be stock that is being sold by existing shareholders (though there are limitations on stock sales by company affiliates). Thus, Regulation A can be an avenue through which investors holding unregistered stock can sell their shares. The remaining allowable amount under the Regulation must be in the form of funds raised for use by the company.

There are some restrictions on the use of Regulation A. This exemption cannot be used under the following circumstances:

  • The company has been investigated by the SEC for disclosure problems during the preceding five years
  • The SEC is currently reviewing a registration statement filed by the company
  • Any affiliates of the company, or its underwriter, have been convicted of a securities-related crime within the past 10 years

If a company qualifies for this exemption, the basic process flow is to issue an SEC-reviewed offering circular to attract investors, then file a Form 1-A with the SEC, then sell shares, and then file a Form 2-A at regular intervals until the offering has been completed. Audited financial statements are required. Though the filing requirements associated with this exemption are less than those required for an initial public offering, they are still substantial enough to require the services of an attorney and accountant.

In short, Regulation A is designed to be a somewhat streamlined way to raise a moderate amount of cash. If there is a need to raise larger amounts of cash without going public, the Regulation D exemption is a better choice.