The following is a general overview of Regulation A+ offerings as per SEC Form 1-A and is not legal or business advice, and nor should you consider it as such. Requirements for Reglation A offerings differ from case to case. You should not act upon any information shared in this article without seeking professional advice from an experienced attorney and/or accountant directly hired by you. If you need help preparing or filing a Reg-A+ offering, please contact us here.
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Raising Capital Without SEC Registration: Requirements Exemption (How To qualify for a "Reg-A+" Offering
Ever since Elio Motors raised nearly $17 million via crowdfunding in 2016... and went on to achieve a $1.3 Billion dollar valuation within days of listing on the OTCQX...issuers have flocked to Regulation-A+ as a way to raise capital from the public.
Known as a "mini IPO"...in 2020 Reg-A+ offerings raised more than $2.7 trillion in 2020 compared to $1.3 trillion raised by S1 registrants.
The incentives of a Reg-A offering for issuers is obvious:
On average, it costs $150,000 to get 'qualified' for a Reg-A+ offering (less marketing expenses), in comparison to an S1 can easily cost $350,000+.
1-A filings are normally 'qualified' by the SEC in 60 days or less, whereas an S1 registrants can experience months (if not longer) of back-and-forth commentary between lawyers, accountants, and regulators before it's 'cleared to trade'.
Tier 2 issuers can raise up to a maximum of $75 million over a period of six months. (this can be done once a year), whereas there are no limits to the amount of funds that can be raised by an S1 registrant.
Reg-A issuers can market securities directly to the public, including to those who are not 'sophisticated investors' (individuals with a net worth in excess of a million dollars).
There's also fewer reporting requirements under Reg-A than S1 -- keeping in mind that Tier 2 issuers must still provide audited financial statements.
Tier 2 issuers can apply to 'qualify' for a Reg-A+ offering up to $75 million once every 12 months.
This is definitely not a complete list of benefits availalbe to Reg-A issuers, but you get the idea.
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Any company thinking about apply to Qualify for a Reg-A offering should consult with a securities professional.
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Aside from all its benefits...the 'success rate' of the average "Reg-A" offering is impressive:
Approximately 26% of all Reg-A issuers reach their target capital raise at an average of $26 million each.
Those numbers are astonishing given that nearly half of all "Reg-A" issuers have no revenues or cash flow.
In fact, most Reg-A issuers are barely beyond the development stage of their business.
For obvious reasons, it doesn't take much to conclude that a company with an actual history of operations and revenues would have a much greater chance of success with a Reg-A+ offering than 26% (and probably raise more funds too).
How To Qualify For An Offering Under Regulation-A
There are two types of qualifications available under SEC Regulation-A:
Tier 1 and Tier 2.
While most issuers prefer the Tier 2 option, I will briefly explain...
Tier 1: How to raise a maximum of $20 million without formal registration.
Considered 'easier' to qualify for than a Tier 2...Tier 1 applicants are not required to provide audited financial statements when seeking qualification.
The downside, however, is that Tier 1 issuers need to be 'blue skied' in the vast majority of cases -- meaning that the offering must be individually qualified by regulators in nearly every state they want to sell securities in -- apart from (list the states). and they want audited.
Since most Reg-A issuers want access to markets such as NY, FL, CA, TX, VT, etc. (each of which requires audited financial statements) it doesn't make sense for most issuers to apply for a Tier 1 offering.
As such, most issuers interested in a Reg-A offering opt for...
Tier 2: How to raise a maximum of $75 million without formal registration.
When filing a Form 1-A with the SEC, issuers seeking qualification for a Tier 2 offering must enclose audited financial statements.
Requirements for filing a Form 1-A seeking qualification are similar for both Tiers.
Download form 1-A here >>
To qualify for a Reg-A offering an issuer must:
Be organized under federal, state, or provincial laws in either the United States or Canada.
Have its principal place of business in either the United States or Canada.
Have a specific business plan that does not include a plan to merge with an unidentified company or companies.
Not be an Investment company that is registered (or required to be registered) under the Investment Company Act of 1940.
Not be issuing fractional undivided interests in oil or gas rights, or similar interest in other mineral rights.
Not be issuing asset-backed securities related to debt as defined in Item 1101(c) of Regulation AB (i.e., credit card debt, mortgages, etc.).
Not have been subject to an order by the SEC pursuant to Section 12(j) of the Securities Exchange Act (15 U.S.C. 78l(j)) for a minimum of five years. (EXPLAIN)
And the issuer must be current with all reports that are required to be filed with the SEC for the two-year period (if applicable) immediately prior to filing form 1-A (depending on how long the issuer has been in business for, up to two years worth of financial statement disclosures may be required).
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Reg-A Filing Requirements
Issuers either qualified or seeking to be qualified for an offering under "Reg-A"
are required to submit current and periodic reports to the SEC as follows:
Annual Reports as per form 1-K, including audited financial statements for Tier 2 issuers.
Special Financial Reports: This includes audited financial statements for the entire history of the issuer (up to two years prior to filing a Form 1-A).
Semiannual Report: covering the first six months of the fiscal year using form 1-SA.
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IMPORTANT TO NOTE:
No one issuer's filing requirements and obligations are the same as another.
Apart from being faster and cheaper than filing an S1, the success rate of a "Reg-A+" offering is impressive:
Roughly 26% of all "Reg-A+" offerings achieve their target raise (at an average of $26 million each).
That's an astonishing number when you consider that most Reg-A issuers have no revenues or cash flow.
And if you think about it, it's not too hard to imagine that the "success rate" of a Reg-A offering for an issuer with actual revenues and cash flow is far greater than 26%.
Regardless, Regulation-A is a great way for issuers to access the marketplace, raise funds (up to $75 million if done right), and gage public interest in their business before deciding on whether or not to file for an S1.
There are two different kinds of "Reg-A" offerings available for issuers to consider -- Tier 1 and Tier 2.
Given that Tier 1 is not practicable for most issuers (You can read more about Tier 1 here),
For the sake of this article, we will focus mostly on Tier 2, which allows an issuer to raise up to $75 Million in a six month time-frame and can be renewed once a year.
It's cheaper for most issuers to 'qualify' for a Reg-A+ offering than it is an S1 Registration (on average $150,000 to qualify for a Reg-A issuance -- not including marketing expenses -- and around $450,000+ for an S1 Registration).
It's normally faster to market than an S1
Also known as a "mini IPO"...Reg-A+ offerings have far-outstripped S1
Essentially a way of bypassing normal SEC registration requirements that are cumbersome, expensive, and time consuming,
In this article we'll talk about using SEC Form 1-A to create a Regulation A offering statement, which provides issuers with an exemption from normal registration requirements -- and is a great way for an issuer to gage market interest in their company, that is much more inexpensive -- in both time and money -- than filing for an S1 Registration.
For your reference, I provide helpful links below, along with a sample of what they should look like when they're done.
Let's dive-in to what the forms are for and who needs to file one:
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