*co-authored by Elizabeth L. Carter, Esq., Managing Attorney
If you are thinking about making a publicly advertised offering for securities with a target raise of more than $10 million you might want to ask an attorney about Regulation A+. As a result of the Jumpstart Our Business Startups (JOBS) Act of 2012, the Securities and Exchange Commission (SEC) issued final rules that amended Regulation A into Regulation A+. This regulation provides another opportunity for small business owners to access capital from both accredited and non-accredited investors, while also protecting investors.
There are two tiers of offerings for securities under Regulation A+. Tier 1 allows for securities offerings of up to $20 million in a 12-month period, and Tier 2 allows for offerings of up to $75 million in a 12-month period. Here, we are going to discuss in greater detail the two tiers and how businesses are utilizing these Regulation A+.
The new Regulation A+ modernized the older regulation and made the filing process simpler for businesses. However, there are some businesses that do not qualify for this exemption. If your company meets any of the following, you would not be eligible: (1) companies registered or required to be registered under the Investment Company Act of 1940; (2) companies that are in the development stage with no business plan or have an intent “to engage in a merger or acquisition with an unidentified company or companies [i.e. “blank check companies or Special Purpose Acquisition Companies (SPAC)];” (3) a business with a fractional undivided interest in mineral rights such as oil and gas rights; (4) issuers that have failed to file required reports with the SEC under the Regulation A+ rules; (5) issuers who had their registration suspended or revoked by the SEC; and (6) companies that meet “bad actor” disqualification.
Rule 262 of Regulation A+ was amended to include “bad actor” disqualification clauses and expanded what was already in Rule 506(d). Under 506(d), an issuer or any other covered person is disqualified if they have a “relevant criminal conviction, regulatory or court order or other disqualifying event that occurred on or after September 23, 2013.” If the disqualifying event happened prior to September 23, 2013, there are certain disclosures that need to be made.
In addition to the already existing bad actor disqualification provisions, Regulation A+ also included other disqualifying factors such as cease-and-desist orders from the SEC for violations of scienter-based anti-fraud provisions of federal securities laws and final orders of certain state and federal regulatory authorities. A final order is a “written directive or declaratory statement issued by one of the federal or state regulatory agencies listed above, under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.”
For compliance purposes, the integration doctrine must also be considered when conducting a Regulation A+ offer. This doctrine provides rules to determine whether multiple securities offerings will be combined into one offering. A business issuer runs the risk of violating SEC exemption or registration rules if not careful to consider the integration doctrine. In order to determine whether multiple offers will be integrated into one offer, an analysis of the specific facts and circumstances surrounding the offerings must be made. Regulation A+ provides “safe harbor” rules to help prevent integration of multiple offerings made in conjunction with a Regulation A+ offer.
In addition to the aforementioned requirements, the SEC has created an opportunity for issuers to engage in discussions with investors under the“testing the waters” doctrine. The “testing the waters” discussions will help issuers gauge investors interest in their offering prior to expending costs of conducting the offering. As of March 15, 2021, the SEC recently changed the rules around “testing the waters” which now applies to all exempt offerings, including private offerings. The doctrine now requires that the solicitation remain generic and not specify any particular exemptions. For instance, a business must generically state that it plans to conduct an offering instead of stating that it plans to conduct a Regulation A+ offering specifically.
The rules around certain disclaimers under the “testing the waters” doctrine have remained the same. In order to utilize this doctrine, “testing the waters” materials should contain certain disclaimers and disclosures to potential investors. The materials must state the following, including but not limited to:
No money or other consideration is being solicited, and if sent in response, will not be accepted;
A person’s indication of interest involves no obligation or commitment of any kind; among others.
In addition, all “testing the waters” materials are subjected to anti-fraud and other civil liability protections under federal and State securities laws. Furthermore, such “testing the waters” materials may be subjected to State securities registration rules. It is important to retain legal counsel to help ensure compliance with these complex rules.
After a business has done all of the compliance checks above, it will then need to determine whether it would like to conduct the Regulation A+ offering pursuant to Tier 1 or pursuant to Tier 2. Under Tier 1, companies can raise up to $20 million in a 12-month period from both non-accredited and accredited investors. The business is limited to raising no more than $6 million from affiliates. An affiliate of an issuer is an entity that is in control of, controlled by, or under common control with the issuer and is issuing securities in the same offering, including offerings subject to integration pursuant to Rule 502(a)).
A business may decide to issue an offering under Tier 1 because the SEC does not require a financial audit prior to filing or ongoing annual reports which is costly. Still, issuers conducting offers under Tier 1 will still need to disclose financial statements subjected to SEC review upon filing. Furthermore, Tier 1 offers have to adhere to State securities registration laws, including State financial audits, called Blue Sky Laws. These laws will vary by State and will generally require State registration of an offering which can be costly.
For many other businesses, the Tier 2 option may be more appealing than Tier 1. Tier 2 permits companies to raise up to $75 million in a 12-month period from both accredited and non-accredited investors. These offerings are limited to no more than $15 million from affiliates of the issuer. Unlike Tier 1, offers under Tier 2, do not have to adhere to Blue Sky laws. However, Tier 2 offers are required to provide the SEC with annual financial audits that must follow Generally Accepted Accounting Principles (GAAP). GAAP is “based on established concepts, objectives, standards and conventions that have evolved over time to guide how financial statements are prepared and presented.” Lastly, under Tier 2, the SEC requires financial statements every 6 months. All of the required financial statements must be audited by an independent accountant. Tier 2 also sets limitations on the amount of securities a non-accredited investor can purchase.
Under Tier 2, a non-accredited investor can purchase securities no more than: (a) 10% of their greater annual income or net worth; or (b) 10% of the greater of annual revenue or net assets at fiscal year-end. An accredited investor includes s a natural person who makes over $200k in annual income or who has e a net worth that exceeds $1 million.
As you can see, navigating the SEC’s Regulation A+ exemption can be confusing and complex. If this is an offering that you are interested in for your business you should contact us for a consultation.