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SEC Exemption for Small Companies to raise capital

Auditing the Consolidated Financi al Statements 6

Over the time, SEC has adopted various exemptions intended to reduce the complexities of registering the securities that may impede raising the capital for issuers. We have laid out a few exemptions from registrations that are widely considered.

What are SEC Reg A+, SEC Reg D, and Reg S?
Reg A was updated in 2015 as part of the Jumpstart Our Business Startups (JOBS) Act, now known as SEC Reg A+. Reg A+ allows companies to generate income under two separate tiers, Tier 1 and Tier 2, representing two different types of investments. Regulation A+ can be assumed as a substitute for a small registered IPO. It is an exemption from the registration requirements that allow companies to offer and sell their securities without registering their offering with the SEC.

Regulation A + is bifurcated into two offering tiers: Tier 1, for offerings of up to $20Mn in 12 months; and Tier 2, for offerings of up to $75Mn in 12 months. For offerings of up to $20 million, companies can choose to proceed either with Tier 1 or Tier 2.

Ongoing compliance and reporting:

  • Both the offerings from Tier 1 and Tier 2 financial statements are required for at least the last two fiscal years or since the company’s inception if it is less than two years old.
  • The offerings listed under Tier 2 require the statements to be professionally and independently audited according to generally accepted auditing standards (GAAS) or as per the Public Company Accounting Oversight Board (PCAOB) standards.
  • Tier 1 offerings are spared with the ongoing reporting regime; only the exit report (Form 1-Z) is obligatory to be filed within 30 days after the offer’s closing.
  • Filing of annual (Form 1-K) and semi-annual (form 1-SA) reports on an ongoing basis is mandatory for the issuers conducting Tier 2 offerings. In addition, they are also supposed to file the current event reports (Form 1-U) whenever certain changes to the business occur.

Tier 1

Tier 2

Offering Limit

$20 Mn in a 12 month period

$75 Mn in a 12 month period
Types of Investors All, Non-Accredited and Accredited All, Non-Accredited and Accredited
Offering Documents SEC and State Review SEC Review
Individual State Fees Yes No
Financial Disclosures Reviewed Financials Audited Financials

Reg A+ offerings are available to private and public companies based in U.S. and Canada. However, there are certain limitations that do not allow the following companies to be eligible to use Reg A+:

  • Blank check companies – The companies that either have no specific business plan/purpose or have stated that their business plan is to acquire or merge with an undisclosed company(s)
  • The companies registered under the Investment Company Act of 1940, whose primary functions are investing, reinvesting, and trading in securities
  • Companies which are disqualified under a “bad actor” rule (e.g., if the issuer or other related parties have received criminal convictions, court injunctions, SEC disciplinary orders, etc.).

For a company to begin a Reg A+ offering, it must file a form Form 1-A with the SEC. The filing needs to be completed electronically on the SEC’s EDGAR system, and once the SEC reviews and qualifies the offering, companies may then begin selling securities.

Reg D is the SEC regulation governing private placement exemptions that allow companies to raise capital by selling equity or debt securities without registering their offering of securities with the SEC. Under the Rule 504 of Regulation D, the issuer is able to raise capital of up to 10Mn in a 12-month period.  It allows sales to both accredited and non-accredited investors. Rule 504 of SEC Reg D is exclusively available to companies that are not subject to SEC reporting requirements. Moreover, it cannot be used by investment companies, companies with no specific business, or companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.

On the other hand, Rule 506 of Regulation D further provides two different exemptions from registration for companies. Under Rule 506 exemptions, companies can sell securities to an unlimited number of accredited investors and can raise a total amount of money. Rule 506 is considered the most significant among the investors, and it further splits into two different variations, 506b, and 506c.

The requirement for the companies offering under Rule 506(b) are as follows:

  • Prohibition on general solicitation or advertising to market the securities;
  • The securities can be sold to accredited investors, and up to 35 non-accredited investors can be considered with certain conditions

Ongoing compliance and reporting:

  • Under Rule 506(b), it is entirely company’s prerogative as to what information they wish to supply to the accredited investors, as long as it does not violate the antifraud prohibitions and should not have any false or misleading statements.
  • For the non-accredited investors, the company under the Rule 506(b) ought to disclose the documents that are mostly the same as those used in Regulation A or registered offerings, including financial statements, which in some cases may need to be certified or audited by an accountant.
  • Under Rule 506(c), a company is allowed to solicit and advertise the offering broadly and shall still be considered to be in compliance with the requirements of the said exemption if all the investors in the offering are accredited; and the documents such as W-2s, last filed tax returns, bank/brokerage statements, credit reports, etc., are verified to authenticate the accredited investors.

Purchasers of securities offered under the Rule 506 receive “restricted” securities, which implies that the securities cannot be sold for at least 6-12 months without registering them. Furthermore, the company or entrepreneur must file a Form D disclosure document with the SEC after the first securities are sold.

Reg S, famously classified as “safe harbor” exemption, allows U.S. companies to raise capital outside the U.S under an SEC-compliant way. The same provides an exclusion from the Section 5 registration requirements of the Securities Act for offers made outside the United States by both U.S. and foreign issuers to non-U.S. persons of any wealth level. It implies that it opens doors to pitch both accredited and non-accredited investors.

It must be noted that equity securities placed offshore by domestic issuers under Reg S will be classified as “restricted securities” and thus are restricted from being resold in the United States during a compliance period, which is generally for 12 months.

Ongoing compliance and reporting:

  • SEC requires the sales of equity securities by U.S. issuers under Reg S to be reported on Form 8-K within 15 days of the event.
  • Reg S definitely does not protect any business from any fraud liability and under no conditions are any other laws connected with an issuer’s offering are given any flexibility because they relied on Reg S.


  • The main difference is that Regulation S is intended for offerings aimed exclusively at international investors, while Reg A+ and Reg D is solely for companies based in U.S. and Canada
  • While for Reg D and Reg S, there is not any limit on how much you can raise, for Reg A+, the maximum is $75m/year.
  • Reg A+ has auditing requirements; however investors opting for exemption under Reg D and Reg S do not have any
  • Reg A+ and Reg S allows market offering to non-accredited investors; however there are specific requirements which gets implied for non-accredited investors under Reg D
  • Since Reg A+ has reporting requirements to SEC, it allows one to take their company public to the NASDAQ or NYSE.

Written by- Supriya Arora

MAS is registered with PCAOB, USA, and has assisted its clients with providing audit and assurance services for over a decade to various clients in the United States, including broker-dealers. We serve different broker-dealer firms registered in the United States w.r.t. their audits under Rule 17a-5 under the Securities Exchange Act of 1934 (FINRA Audit). In case you have any questions or wish to know more about SEC Reg A+ and Reg D, kindly contact us.


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