Written by Edgar Agents on April 17, 2018

What is Reg A+?

Reg A+ is a new version for the SEC’s original Regulation A. It’s also called a “mini-IPO.”

Reg A has been around for several years, however, it was seldom used because it was accessible to only very small financings, had many restrictions and was costly. As part of 2012’s JOBS (Jumpstart Our Business Startups) Act, the SEC was tasked with updating Reg A to make it more beneficial as a capital-raising tool. Reg A+ is the final outcome and became effective on June 19, 2015.

 

How is Reg A+ an enhancement over Reg A?

The key benefits of Reg A+ include:

  • Companies can raise up to $50 million every 12 months. (with $75 million now being considered in committee)
  • Insiders can sell their shares in a Reg A+ offering.
  • Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
  • Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
  • Some Reg A+ offerings are easier to list on an exchange, and, under proposed rules, ongoing Reg A+ reporting requirements satisfy OTCQB (Venture Marketplace) disclosure requirements.
  • Reg A+ can be used for merger and acquisition transactions.

 

What companies are eligible to use Reg A+?

Reg A+ can be used by any company – including shell companies and issuers of penny stock – that is accountable under US or Canadian law and has its principal place of business in the US or Canada.

The following type organizations CANNOT benefit from Reg A+:

  • “Blank check” companies
  • Certain “bad actors” (companies or their principals have committed certain “bad acts”
  • Companies that have not filed required Regulation A reports for two preceding years
  • Companies that issue fractional interests in oil and gas
  • Companies whose registration has been revoked by SEC within five years
  • Investment companies
  • SEC reporting companies

 

What is the Reg A+ filing process?

To offer securities under Reg A+ an eligible issuer must file and qualify an offering statement on SEC Form 1-A. Qualification is akin to a traditional S-1 registration statement declared effective by the SEC.

Form 1-A has three parts:

  • Part I – an XML-based fillable form with basic information about the issuer, the offering, the securities being issued, etc.
  • Part II – information about the issuer and the securities, including risk factors, use of proceeds, business description, MD&A-type disclosure, compensation, financial statements (see details below), and securities ownership; in many cases, this information is limited
  • Part III – exhibits

Some requirements of Reg A+ depend upon the amount of the offering. Reg A+ provides for two types of offerings:

  • Tier 1: offerings up to $20 million every 12 months
  • Tier 2: offerings up to $50 million every 12 months (with $75 million now being considered in committee)

 

Has Edgar Agents filed 1-A filings for RegA+ Issuers?

Edgar Agents have contributed greatly to the process (and success) for many companies. In fact, as of iPic’s February IPO, 33% of the RegA+ offerings that went effective on the NYSE and Nasdaq exchanges is our work.

 

What kind of financial statements must be submitted?

Two years of financial statements must be submitted. The financial statements must be prepared in accordance with US GAAP. Canadian issuers can comply with IFRS. Beyond that, the answer depends upon the type of offering, as follows:

  • Tier 1 offerings: financial statements don’t follow SEC Regulation S-X; instead, they follow Part F/S. Also, the financial statements don’t need to be audited unless audited financials are available.
  • Tier 2 offerings: financial statements follow Article 8 of SEC Regulation S-X (applicable to smaller reporting companies) and must be audited. The auditor must be independent but need not be registered with the PCAOB unless the issuer is listing on a national securities exchange.

 

How much can insiders sell as part of a Reg A+ offering?

Maximum of 30% per offering, either tiers.

 

What kinds of investors can participate in a Reg A+ offering, and how much can they invest?

  • Tier 1: no investment limitations as to types or amounts
  • Tier 2: non-accredited investors can participate, but only up to 10% of greater of annual income and net worth (individuals) or up to 10% of greater of annual revenues and net assets (for entities); no limits for accredited investors or if securities will be listed on a national securities exchange

 

Can an Reg A+ company communicate with prospective investors?

A Reg A+ issuer can “test the waters” with any potential investors before or after the Form 1-A is filed (and the ability to test the waters under Reg A+ is broader than what’s permitted for EGCs – emerging growth companies).

No offers can be made unless the offering statement has been filed with the SEC.

 

Are Reg A+ confidential filings?

No. Reg A+ issuers can have their filing reviewed by the SEC on a non-public basis, allowing  a company to work out amy regulatory issues in private. The offering statement must be publicly filed at least 21 calendar days before the offering statement is qualified.

 

 Are Reg A+ offerings exempt from individual state “blue sky” laws?

  • Tier 1: No. However, to the extent that smaller offerings are more likely to be local, Tier 1 offerings may involve fewer states. Most states participate in NASAA’s coordinated review program, which calls for a 21-day turnaround on comments. However, merit states will remain a problem.
  • Tier 2: Yes, though states can require issuers to file offering materials and can enforce antifraud provisions.

 

How does Reg A+ facilitate Exchange Act registrations?

Issuers using Tier 2 may register for an exchange listing using Form 8-A rather than the much lengthier Form 10, though they must follow Part 1 of Form S-1. The filing of a Form 8-A will suspend Reg A/A+ reporting obligations, but normal public company reporting obligations will kick in on filing.

Note that Reg A+ issuers are not subject to full public company reporting. An issuer must register under the Exchange Act once it has 2,000 shareholders of record, but Reg A+ shareholders are excluded from the 2,000 share count if the issuer:

  1. Is current with Reg A/A+ filings.
  2. Has a registered transfer agent.
  3. Is a smaller reporting company

 

Are shares issued in a Reg A+ offering freely tradable?

Yes, though affiliate restrictions apply.

 

Post 1-A effectiveness, what SEC files are Reg A+ issuers required to file?

Tier 1: Form 1-Z Exit report; due 30 calendar days after termination of offering
Tier 2: Form 1-K Short “10-K,” due 120 days after year-end
Form 1-SA Short ”10-Q,” but semiannual; due 90 days after first 6-month period of year
Form 1-U Similar to an 8-K, but only for more critical events; due 4 business days after triggering event
Form 1-Z Exit report; due 30 days after termination of offering or on Form 1-SA (if filed first)

 

What are the risks?

Reg A+ offerings are public offerings, so there is liability under Section 12(a)(2) of the Securities Act for any material misleading statements or omissions in the offering statement. Because Reg A+ offerings are not registered, there is no liability under Section 11 of the Securities Act, but offering statements can still be subject to the antifraud provisions of the federal securities laws. Test the waters communications are also subject to antifraud liability.