Regulation a

What Is Regulation A?

Regulation A is a federal exemption from the registration requirements under the Securities Act of 1933, allowing smaller companies to offer and sell their securities to the public without undergoing the more extensive and costly process of a full public initial public offering (IPO). This regulatory framework falls under the broader category of capital markets and aims to facilitate capital formation for small and medium-sized businesses. It is often referred to as Regulation A+ due to significant amendments made in 2015. Regulation A provides a pathway for companies to raise capital from both accredited investors and non-accredited investors, democratizing access to private investment opportunities.

History and Origin

Regulation A, originally enacted as part of the Securities Act of 1933, was largely underutilized for decades due to its low offering limits and cumbersome compliance requirements⁵⁰, ⁵¹. This changed dramatically with the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. The JOBS Act aimed to stimulate economic growth and job creation by easing access to capital for small businesses and startups following the financial crisis⁴⁹.

Title IV of the JOBS Act specifically directed the U.S. Securities and Exchange Commission (SEC) to modernize and amend Regulation A⁴⁷, ⁴⁸. These amendments, which became effective on June 19, 2015, ushered in what is commonly known as Regulation A+⁴⁵, ⁴⁶. The updated Regulation A introduced two distinct tiers, significantly increasing the amount of capital companies could raise and making the exemption more appealing and practical for a wider range of issuers⁴⁴. This revamp was intended to provide a middle ground between traditional registered offerings and smaller, private exemptions⁴³.

Key Takeaways

• Regulation A provides an exemption from full SEC registration for public offerings, primarily benefiting smaller and emerging companies.
• It is divided into two tiers, allowing companies to raise up to $20 million (Tier 1) or $75 million (Tier 2) within a 12-month period.
• Unlike many private offerings, Regulation A permits companies to solicit investments from the general public, including non-accredited investors, subject to certain limitations in Tier 2.
• Companies conducting a Regulation A offering must file an offering statement (Form 1-A) with the SEC, which undergoes a review process similar to an IPO.
• It offers a less expensive and faster alternative to a traditional IPO while still providing a path to public capital markets.

Interpreting Regulation A

Regulation A is interpreted as a vital tool for companies seeking to raise growth capital from a broader investor base than traditional private funding rounds allow. Its two tiers offer flexibility based on the capital needs and reporting capabilities of the issuer.

Tier 1 offerings allow companies to raise up to $20 million in a 12-month period⁴². While Tier 1 offerings do not require audited financial statements unless already prepared, they are subject to review and qualification by state securities regulators in addition to the SEC⁴⁰, ⁴¹. This dual regulatory burden, often referred to as "blue sky" review, can add complexity and cost³⁸, ³⁹.

Tier 2 offerings, on the other hand, permit raising up to $75 million within a 12-month period (increased from $50 million in March 2021)³⁶, ³⁷. A key distinction for Tier 2 is that it preempts state blue sky laws for registration and qualification, simplifying the multi-state offering process³⁴, ³⁵. However, Tier 2 requires companies to provide audited financial statements and file ongoing annual, semi-annual, and current reports with the SEC³³. For non-accredited investors in Tier 2 offerings, there are investment limitations typically capped at 10% of the greater of their annual income or net worth³².

Companies utilize Regulation A to gain access to public markets and diversify their investor base beyond institutional or accredited investors, and to engage in "testing the waters" to gauge investor interest before committing to a full offering³¹.

Hypothetical Example

Imagine "GreenVolt Energy Inc.," a startup developing innovative solar panel technology, needs to raise $15 million to scale its manufacturing and expand its market reach. GreenVolt Energy, after consulting with its legal and financial advisors, decides that a Regulation A Tier 2 offering is suitable.

1. Preparation: GreenVolt Energy prepares its offering statement on Form 1-A, including audited financial statements and detailed disclosure about its business, risks, and the offering terms.
2. SEC Review: The company files Form 1-A with the SEC. The SEC staff reviews the filing, provides comments, and GreenVolt Energy revises the document until it is "qualified" by the SEC.
3. "Testing the Waters": Before final qualification, GreenVolt Energy conducts a "testing the waters" campaign, using online platforms and advertising to gauge public interest. They inform potential investors that no money is being solicited or accepted at this stage.
4. Offering Launch: Once qualified, GreenVolt Energy begins accepting investments. They market the offering broadly, reaching out to individual investors across the country. An individual investor, Sarah, who is not accredited, decides to invest $5,000, which is within the 10% limit of her annual income.
5. Capital Raised: Over several months, GreenVolt Energy successfully raises the $15 million, with contributions from a mix of accredited and non-accredited investors.
6. Post-Offering: As a Tier 2 issuer, GreenVolt Energy now files ongoing reports with the SEC, maintaining transparency for its new public shareholder base.

This example illustrates how Regulation A allows a growing company to access public capital without the full burden of a traditional IPO.

Practical Applications

Regulation A plays a significant role in helping eligible companies access public capital outside of traditional IPOs. Its practical applications include:

• Growth Capital for Small Businesses: It provides a viable pathway for small and medium-sized enterprises (SMEs) to raise substantial capital for expansion, research and development, or market penetration. Companies like Fundrise, a real estate investment platform, and Elio Motors, an autocycle startup, have successfully utilized Regulation A³⁰.
• Democratizing Investment: By allowing non-accredited investors to participate, Regulation A broadens the pool of potential investors beyond wealthy individuals and institutions, fostering greater public participation in early-stage companies²⁹. This aligns with the spirit of equity crowdfunding.
• Direct Public Offerings (DPOs): Many companies use Regulation A to conduct DPOs, which can bypass traditional underwriters and potentially reduce offering costs²⁸. Newsmax, for instance, raised $75 million through a Regulation A DPO, listing directly on the NYSE²⁷.
• Alternative to Venture Capital or Private Placements: For companies that may not fit the profile for traditional venture capital funding or prefer public capital access, Regulation A offers a structured alternative. Real estate companies, in particular, have found Regulation A to be a very successful fundraising vehicle, accounting for a significant portion of capital raised through this exemption²⁵, ²⁶.
• Testing Investor Interest: The "testing the waters" provision allows companies to gauge market interest before incurring significant legal and accounting fees associated with a full offering, reducing upfront investment risk²⁴.

The official guidance on Regulation A can be found on the SEC's website, providing detailed information for issuers and investors.²³

Limitations and Criticisms

Despite its advantages, Regulation A has several limitations and has faced criticism.

One primary concern is the relatively high offering costs compared to the amount of capital raised, particularly for smaller offerings²². While less expensive than a full IPO, the legal, accounting, and marketing expenses can still be substantial, potentially deterring very early-stage startups²¹. Additionally, the time taken for SEC review and qualification of the offering statement can be lengthy, sometimes up to six months or more²⁰.

Another critique centers on investor protection, especially for non-accredited investors who may lack the sophistication or resources for thorough due diligence. Critics argue that allowing the general public to invest in often speculative, early-stage companies through Regulation A increases the potential for investment risk and fraud¹⁸, ¹⁹. The North American Securities Administrators Association (NASAA) has voiced concerns about the preemption of state "blue sky" review for Tier 2 offerings, arguing that state-level oversight is crucial for identifying fraud¹⁷. A study also suggested that Regulation A securities have, on average, underperformed the broader market, and that companies using Regulation A are often younger, smaller, and less profitable¹⁶.

Furthermore, while Tier 2 offerings preempt state registration requirements, some states may still impose restrictions or require companies to register as dealers to sell securities within their borders, complicating the process in certain jurisdictions¹⁵. Finally, while Regulation A facilitates public offerings, companies using this exemption may still face challenges in listing on national securities exchanges due to difficulties in meeting quantitative and qualitative requirements¹⁴. A comprehensive investor bulletin from the SEC's Investor.gov provides insights into these risks for potential investors.¹³

Regulation A vs. Regulation D

Regulation A and Regulation D are both regulatory exemptions from the full SEC registration requirements for offering securities, but they differ significantly in their scope and target investor base.

The core confusion often arises because both are used for private companies to raise capital without a full IPO. However, Regulation A is designed for broader public participation, functioning as a "mini-IPO," while Regulation D is typically used for private offerings aimed primarily at accredited investors. Companies choose between Regulation A and Regulation D based on their capital needs, target investor base, and willingness to undertake ongoing disclosure requirements.

FAQs

Q: Can any company use Regulation A?

A: No, certain companies are ineligible, such as those already reporting to the SEC, investment companies, or "blank check" companies (those with no specific business plan)¹². The company must be organized and have its principal place of business in the U.S. or Canada¹¹.

Q: What is the difference between Tier 1 and Tier 2 of Regulation A?

A: Tier 1 allows companies to raise up to $20 million and requires state securities registration in addition to SEC qualification. Tier 2 allows raising up to $75 million, preempts state registration, but requires audited financial statements and ongoing SEC reporting⁹, ¹⁰. Both tiers necessitate filing an offering statement with the SEC⁸.

Q: Are investments made through Regulation A risky?

A: Investments in companies utilizing Regulation A can be speculative and involve significant investment risk, especially since many are early-stage or smaller businesses⁶, ⁷. Investors should carefully review the offering circular and understand the potential for illiquidity and loss of capital. The SEC does not endorse or approve the merits of any securities offered under Regulation A⁴, ⁵.

Q: Do companies using Regulation A become publicly traded?

A: Not necessarily. While Regulation A offerings allow public sales, they don't automatically result in a listing on a major stock exchange like the NYSE or Nasdaq. Some companies may choose to list on over-the-counter (OTC) markets, while others may remain unlisted but publicly accessible², ³. However, some have successfully used Regulation A as a stepping stone to list on major exchanges¹.