Understanding Regulation A for Securities Offerings
Under U.S. securities laws, a sale or offering of a security must be registered with the Securities and Exchange Commission (SEC), unless it meets an exemption.
Regulation A serves as an exemption from these registration requirements, established by the Securities Act of 1933, specifically for public offerings of securities. Companies citing this exemption gain distinct benefits compared to those that fully register, including eased documentation requirements.
Nonetheless, there are tiers determined by the company size and financial scope. Companies must still file an offering statement with the SEC, providing buyers with required documentation akin to a registered offering’s prospectus.
Key Takeaways
- Regulation A Exemption: Applies to public offerings, providing a registration exemption with the SEC.
- Two Investment Tiers: Regulation A was updated in 2015, allowing companies to generate income under two distinct tiers.
- Tier 1: Issuing up to $20 million with limited ongoing reporting requirements but a final status report is necessary.
- Tier 2: Issuing up to $75 million with mandatory audited financial statements and continuous reporting.
In-Depth Insights on Regulation A
The advantages provided by Regulation A offerings generally compensate for the detailed documentation required. Some notable benefits include simplified financial statements, optionality in three possible formats for the offering circular, and zero obligation to furnish Exchange Act reports unless the company surpasses 500 shareholders or holds $10 million in assets. The 2015 amendments permit companies to generate income under two distinct tiers.
Knowing the tier classification of a given security under Regulation A is crucial for potential investors. The disclosure or offering circular must clearly state the specific tier.
Regulation A: Comparing Tier 1 and Tier 2
Companies harnessing the Regulation A exemption can choose between two tiers, each with unique conditions. Nevertheless, all issuers must file an offering statement including an offering circular with the SEC:
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Tier 1:
- Companies can announce offerings up to $20 million in a 12-month period.
- Filed offering statements need approval from state regulators where the company intends to sell securities.
- No continuous reporting obligations exist, aside from a mandatory final status report of the offering.
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Tier 2:
- The maximum offering limit stretches to $75 million in a 12-month period.
- Issuers must produce audited financial statements and maintain continual reporting, including the final status.
- Tier 2 issuers aren’t obliged to register with or qualify the offering with state regulators, although SEC filing is required.
- Extra criteria apply, such as investment limits for non-accredited investors in Tier 2 securities.
Regulation A provides a significant conduit for companies to issue securities publicly while enjoying exemptions from some stringent registration requirements, thus offering flexibility, especially for smaller or mid-sized enterprises.
Related Terms: Securities Act of 1933, financial statements, offering circular, prospectus.
References
- U.S. Securities and Exchange Commission. “Regulation A”.
