The Original Regulation A

Regulation A was completely changed several years ago, and is now referred to as Regulation A+. The original version of Regulation A was designed for companies that had been in business for a while, and which weren’t going to raise much money, with a cap of $5 million per year. They didn’t have to sell shares to accredited investors – which is essentially rich folks – and they didn’t have any ongoing reporting requirements to the Securities and Exchange Commission. And there weren’t any restrictions on the resale of these shares. So, in short, the original version reduced a lot of the bureaucracy associated with fund raising, and really opened up the potential pool of investors, but there was a hard cap on how much money you could raise. It was a mixed bag, so a lot of companies didn’t use it.

Tier 1 of Regulation A+

So, what has changed? A lot. Under the new Regulation A+, a company can issue shares under two tiers. The easier tier is Tier 1, where you can raise up to $20 million per year. Anybody can buy the shares, and the shares will be freely tradable. That’s the good side. On the down side, you’ll have to file some forms with the SEC. And, having dealt with the SEC, I can say that that is not a good thing. You’ll have to create an offering circular and have it reviewed by the SEC. That means you’ll have to hire an attorney to create the document, and this person is a specialist – so the bill will be in the tens of thousands of dollars. The requirements for it are stated on the SEC’s Form 1-A. The list of requirements for this form is 30 pages long, and the form states that it’s estimated to take more than 700 hours to complete. It’s essentially a stripped-down version of the prospectus that you’d issue for an initial public offering. So, pretty painful.

This document has to be submitted to the SEC, and after they review and approve it, you can sell shares. Keep in mind that the SEC might not approve it, in which case you could spend a few months going back and forth with them before they think the paperwork is acceptable.

Then you sell the shares to investors, and when you’re done, you file a Form 1-Z with the SEC. This documents the completion of the offering. And, in a first for the SEC, this form is really short – just two pages, and they estimate that it takes only one-and-a-half hours to complete.

Tier 2 of Regulation A+

And then we have the second option, which is Tier 2. Under this option, you can sell up to $75 million dollars of shares per year. And, the shares will be freely tradable – no restrictions. But there are issues, too. In this case, you’ll still have to file the offering circular with the SEC, and wait for its approval before you can sell any shares. Also, you’ll have to file a Form 1-K annual report with the SEC that includes audited financial statements, so – yes – you’ll have to have your financial statements audited, which increases the expense. The Form1-K is a bit of a pain, because you also have to include a discussion of financial results, and information about the business, and related-party transactions, and share ownership. Which is starting to sound a lot like the Form 10-K that public companies have to file with the SEC once a year. And on top of that, a Tier 2 company has to file a Form 1-SA semi-annual report that includes interim unaudited financial statements, and a discussion of the company’s financial results. And – not done yet – a Tier 2 company also has to file a Form 1-U within four business days of certain events, such as a bankruptcy, a change in the external auditor, or a change in control of the business.

And a further problem is that, under Tier 2, there’s an investment limit for non-accredited investors. Their investments are limited to no more than 10 percent of the greater of their annual income or net worth, with some variations.

If you’ve ever been involved in the reporting for a publicly-held company, you might wonder why they ever came up with the Tier 2 option, because it’s pretty close to the requirements for a regular public company. As I mentioned, the Form 1-K is an awful lot like the Form 10-K, while the Form 1-SA is really similar to the quarterly Form 10-Q that a public company has to issue. And the Form 1-U is really close to a public company’s Form 8-K. All of which I’ve had to file, and they’re a lot of work. So in short, it looks to me as though somebody at the SEC formed a committee to come up with a funding option that has fewer requirements than you need to go public, and ended up with a bastardized version that has most of the bureaucracy and a cap on your annual fund raising. Which doesn’t make a whole of sense. Especially since a Tier 2 company has to keep filing these extra reports, year after year.

A key feature of these stock sales is that shares are freely tradable. This might initially appear to be a really valuable feature for investors. However, because the shares are not being traded on a public exchange, it still may be difficult for them to sell their shares.

Who Can Use Regulation A+

So, who can use Regulation A+? That would be any non-public U.S. or Canadian companies, with a few exceptions, such as investment companies.

Now, who should use this funding option? I would say that the Tier 1 option is reasonably attractive, since there aren’t any ongoing annual reporting requirements, though the Form 1-A is still a pain to create. I would avoid Tier 2, since it would make more sense to just go public, in which case you wouldn’t have to deal with the $75 million annual cap on stock sales.