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Exempt Offering under Regulation A

Regulation A Going Public Attorneys 2 e1434459750255

If a company decides to undertake a registered public offering, the Securities Act requires it to file a registration statement with the SEC before it may offer its securities for sale to the public to raise capital. However, smaller companies in earlier stages of development can legally offer and sell its securities without registering with the SEC pursuant to Regulation A. It is an exemption from registration for public offerings.

Regulation A offers a streamlined pathway for efficiently raising up to $50 million in capital for entrepreneurial and established small cap companies interested in conducting an IPO or completing a follow-on offering. It has two offering tiers:

Tier 1: For offerings of up to $20 million in a 12-month period; and
Tier 2: For offerings of up to $50 million in a 12-month period. 

Issuers in Tier 1 offerings are needed to provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the commission on EDGAR within 30 calendar days after termination or completion of an offering. 

Issuers in Tier 2 offerings are needed to electronically file annual and semiannual reports, as well as current reports and, in certain circumstances, an exit report on Form 1-Z, with the commission on EDGAR.

Companies can elect to proceed under the requirements for either Tier 1 or Tier 2, for offerings of up to $20 million. Recently, SEC adopted amendments extending Regulation A to SEC reporting companies. This amendment will provide OTCQX and OTCQB traded7 companies with an alternate to conduct a private investment in public equity (PIPE) transaction, reverse stock split, S-3 shelf offering or traditional IPO.

Reg A is available to only companies which organized in USA and Canada and also their principal place of business is in US and Canada.
It’s not available to the following companies:

  • Companies which are registered or needed to be registered under the Investment Company Act of 1940 and BDCs;
  • Blank check companies;
  • Issuers of fractional undivided interests in oil or gas rights, or similar interests in other mineral rights;
  • Issuers that are needed to filed with the Commission the ongoing reports required by the rules under Regulation A during the two years immediately preceding the filing of a new offering statement (or for such shorter period that the issuer was required to file such reports), but have not filed the same;
  • Issuers which have been subject to an order by the Commission denying, suspending, or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act that was entered within five years before the filing of the offering statement; and
  • Issuers that are subject to “bad actor” disqualification under Rule 262.

There is a limit on the types of securities eligible for sale under Regulation A to the specifically enumerated list in Section 3(b) (3) of the Securities Act, which includes warrants and convertible equity and debt securities, among other equity and debt securities. From the list of eligible securities the final rules exclude asset-backed securities.

Benefits of Regulation A

  • General Solicitation: The JOBS Act eliminated the SEC’s longstanding ban on general solicitation for several offering types, including Regulation A. Now, companies can publicly advertise and communicate details of the offering to its customers and potential investors using the web, video, social media and other means.
  • Reduced Ongoing Disclosure Requirements: Under Rule 257 of the Securities Act, Tier 2 companies that aren’t subject to the full reporting requirements under sections 13 or 15(d) of the Exchange Act are subject to scaled-back annual and “periodic” reporting requirements.
  • S-3 Alternative: To be eligible to file an S-3 shelf offering, a corporation is required to be listed on a national exchange or traded on OTCQX or OTCQB with a market value public float of $75 Million or more. Since OTCQX and OTCQB companies are able to keep a Reg A offering open for 12 months, it offers similar flexibility to an S-3, making it a beautiful alternative for smaller companies.
  • Testing the Waters: Prior to launching a Reg A offering, companies may solicit interest from a wide group of investors, whether they are qualified institutional buyers (QIBs), accredited or non-accredited investors. This process allows the corporate to measure interest before absorbing the administrative, accounting and legal costs associated with a registered offering. It’s estimated that a corporation incurs approximately $500,000 in fees to prepare a traditional S-1 or S-3 registration statement.
  • Blue Sky Preemption: For Tier 2 offerings, OTCQX and OTCQB issuers are exempt from blue sky registration requirements on a state-by-state basis for the initial offering, streamlining the offering process. While post-offering resales of Regulation A securities aren’t preempted under federal law, the OTCQX and OTCQB markets are exempt under blue sky laws in a majority of states for secondary trading purposes.
  • Freely Tradable Securities: Regulations A securities bought by non-affiliates are freely tradable upon issuance, creating an experience of “public offering” and enabling a more liquid secondary market.

The financial statements prepared for Tier 2 offerings must be audited in accordance with either U.S. generally accepted auditing standards or the standards of the PCAOB by an independent auditor. Interim financial statements may be unaudited.

At AJSH, we assist our clients in filing audited financial statements in accordance with PCAOB under Regulation A. If you have any questions or want to know more about Regulation A filings, kindly contact us.


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