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 can issue securities under two tiers. In Tier 1, the maximum amount that can be raised is $20 million per year, and the firm does not have to produce audited financial statements. In Tier 2, the maximum amount that can be raised is $50 million per year, though audited financial statements must be produced. There are several additional requirements for a Tier 2 fund raise.

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 1-Z to document the termination or completion of the offering.  If the company is in Tier 2, it must then file a Form 1-K annual report that includes audited financial statements, a discussion of its financial results, and information about its business and management, related-party transactions, and share ownership. A Tier 2 company must also file a Form 1-SA semi-annual report that includes interim unaudited financial statements, as well as a discussion of the company’s financial results. Finally, a Tier 2 company must file a Form 1-U within four business days of certain events, such as a bankruptcy, change in accountant, or change in control.

A key feature of Regulation A stock sales is that shares are freely tradable. This might initially appear to be an exceedingly valuable feature for investors. However, because the shares are not being traded on a public exchange, it still may be difficult for investors to sell their shares.

In short, Regulation A can be considered a miniature version of an initial public offering. It allows a business to raise a fairly significant amount of money, but incurs significant reporting burdens in exchange.

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