What Is Regulation A? Definition; Update; Documenation; and Tiers

Demystifying Regulation A: A Gateway to Capital Markets

For small businesses and startups, raising capital is a critical step on the path to success. Traditional methods like bank loans or venture capital funding are not always accessible or suitable for every company. This is where Regulation A, an exemption from registration for public offerings, comes into play. Regulation A is often referred to as a “mini-IPO” because it allows companies to offer and sell securities to the public without the rigorous requirements of a traditional initial public offering (IPO).

Understanding Regulation A: The Basics

Regulation A is part of the U.S. securities law that allows companies to raise money from the public. It was initially introduced as part of the Securities Act of 1933, but it was not widely used due to its limitations and the burdensome process involved. However, the Jumpstart Our Business Startups (JOBS) Act, signed into law in 2012, made significant changes to Regulation A, making it more attractive for smaller companies to raise funds.

The updated Regulation A, often referred to as Regulation A+, is designed to help small to medium-sized companies access capital more efficiently while providing investors with more investment opportunities. It does so by easing the regulatory requirements and costs associated with a public offering.

Regulation A+: The Update and Its Implications

The JOBS Act revamped Regulation A with two key tiers that cater to different levels of capital raising and investor protection:

• Tier 1: Allows companies to raise up to $20 million in a 12-month period. While Tier 1 offerings are subject to state securities regulations, they have less stringent ongoing reporting requirements than Tier 2.
• Tier 2: Permits companies to raise up to $75 million in a 12-month period. Tier 2 offerings preempt state securities law review, which can streamline the process, but they require audited financial statements and ongoing reporting obligations similar to those of publicly traded companies.

These updates have made Regulation A a more viable option for companies seeking to raise capital while providing a structured and regulated environment for investors.

Documentation and Filing: The Path to a Regulation A Offering

Embarking on a Regulation A offering requires careful planning and adherence to the Securities and Exchange Commission's (SEC) rules. The documentation process is rigorous, albeit less so than a traditional IPO. Here's an overview of the key documents and steps involved:

• Offering Statement: This includes Form 1-A, which is the official offering document that must be filed with the SEC. It consists of three parts: the notification, the offering circular, and exhibits.
• Offering Circular: Similar to a prospectus in an IPO, the offering circular provides detailed information about the company, its business operations, financial condition, and the terms of the securities being offered.
• Financial Statements: Depending on whether a company is pursuing a Tier 1 or Tier 2 offering, financial statements may need to be audited and included in the offering circular.
• SEC Review: Once submitted, the SEC reviews the offering statement and may provide comments that require amendment before qualifying the offering.

After the SEC qualifies the offering, the company can begin selling securities to both accredited and non-accredited investors, subject to certain limitations and disclosures.

Exploring the Tiers of Regulation A

Let's delve deeper into the two tiers of Regulation A to understand their distinct features and requirements:

Tier 1: The Starting Point

Tier 1 is often seen as a stepping stone for smaller companies looking to test the waters of public fundraising without the full weight of SEC reporting requirements. However, companies must navigate through state securities regulations, which can vary and potentially complicate the process.

Tier 2: A Higher Level with More Oversight

Tier 2 is designed for companies that are ready to raise more significant amounts of capital and can handle the additional regulatory scrutiny. The preemption of state securities law review is a significant advantage, but the requirement for audited financials and ongoing reporting can be a hurdle for some businesses.

Real-World Examples: Regulation A Success Stories

Several companies have successfully utilized Regulation A to raise capital and grow their businesses. For instance, Elio Motors raised nearly $17 million through a Tier 2 offering to fund the production of its three-wheeled vehicle. BrewDog, a craft brewery, leveraged Regulation A+ to expand its operations in the United States, raising millions from beer enthusiasts and investors alike.

Conclusion: Regulation A as a Capital-Raising Catalyst

Regulation A offers a unique opportunity for companies to access public capital markets without the full burden of a traditional IPO. With its two-tiered structure, it caters to a wide range of businesses, from startups to more established companies looking to expand. While the process involves significant documentation and adherence to regulatory standards, the potential benefits of increased capital and investor engagement can be transformative.

As the financial landscape continues to evolve, Regulation A remains a testament to the innovative ways in which regulatory frameworks can adapt to support economic growth and investment opportunities. For companies considering a Regulation A offering, the journey requires careful planning and strategic execution, but the path can lead to new horizons of business development and success.