The SEC released its long awaited Final Rules designed to make Reg A offerings a practically useful means for private companies to raise capital.
Reg A defines the conditions under which a private company can raise capital in an offering exempt from the SEC’s registration requirements.
Shares purchased pursuant to Reg A, therefore, are freely tradable post-offering, that is, for securities regulation purposes. Salability of the shares is still practically limited by the liquidity of the market for the shares.
One of the more attractive features of a Reg A offering is that a company can sell to either non-accredited or accredited investors. This is a major difference from the restrictions imposed on companies using the 506 exemption from SEC registration.
Under the JOBS Act, the SEC was instructed to update the Reg A rules, now known as Reg A+ rules, which had fallen into disuse.
Reg A+ Offerings
Companies that plan to offer securities under the new Reg A+, must submit an offering statement to the SEC for qualification. 1
The Reg A+ offering statement, however, is far simpler than that required for a registered public offering.2 It will require, however, 2 years of financial statement including balance sheets, income, cash flow and equity statements if the company has been in existence that long.
One of the major changes under Reg A+ is the creation of two tiers of offerings, Tier 1 and Tier 2.
Tier 1 of Reg A+ Offerings
Tier 1 permits offering up to $20 million within a 12 month period.
Tier 1 issuers have essentially no ongoing post-offering disclosure requirements other than reporting on securities sold pursuant to the offering.3
Tier 1 offerings, however, still require state securities regulator review of the offering but under a coordinated review process designed to reduce the state “blue sky” review burden.
Tier 2 of Reg A+ Offerings
Tier 2, in contrast, permits offering up to $50 million within a 12 month period but preempts state securities regulation entirely.
Offerings under Tier 2, require the company to make post-offering filings with the SEC including annual and semi-annual financial statements as well as other material current events. 3
A Tier 2 offering also triggers the requirement that the financial statements in both the offering statement and subsequent annual filings be audited.
Each of Tier 1 and Tier 2 offerings have other limitations, including limitations on secondary selling, which are explained in the SEC’s press release (click here) and Final Rules (click here).
Final Rules Pg. 143
Final Rules Pg. 118
Final Rules Pg. 160
Morrison Foerster, the law firm, has also posted a useful and readable recap (click here).
The NY Venture Hub also posted a readable article (click here).