SEC COMPLIANCE

Regulation A+: What It Permits and What It Requires

By Baruch Mackliff, the Capital Commander · PRBE Capital

Topic: SEC compliance for a private raise

Regulation A is often called a mini-IPO, and the nickname does more harm than good. It suggests a smaller version of the same thing, when what it actually offers is a different exemption, with a different review, a different investor base and an obligation set that arrives the day the offering is qualified and does not leave on its own.

Used well, it is one of the few routes that lets a private company sell securities to the general public, take money from investors who are not accredited, and hand them stock that is generally free to resell. That combination is rare, and it is the reason the rule exists. What it costs is a public filing the staff will read line by line, financial statements that can survive an audit, and, on the larger tier, a reporting cycle that continues after the money is in.

What Regulation A actually is

Regulation A is an exemption from the registration requirements of the Securities Act. An offering conducted under it is a public offering. You may advertise it, you may sell to people you have never met, and you are not confined to a list of existing relationships. The securities are still not registered, and the document an investor reads is an offering circular rather than a prospectus.

The centrepiece is Form 1-A, which has three parts. A notification carrying issuer information and the basic terms of the offering. The offering circular itself, holding the business description, the risk factors, the use of proceeds, management and its compensation, related-party transactions and the financial statements. And the exhibits, including organisational documents, material contracts and a legal opinion on the shares being sold.

The form is filed on the Commission's electronic system, and it is read. Which brings up the distinction that governs your entire calendar.

Qualification is a review, not a submission

A private placement involves a notice filed after the first sale. Regulation A does not work that way. The offering circular has to be qualified by the Commission before you may accept a dollar, and qualification follows a staff review that produces written comments you answer in an amended filing, sometimes more than once.

Expect comments in the same places nearly every time. How revenue is recognised. Whether the risk factors describe your business or could be pasted into any filing. Whether the use of proceeds is honest about what happens if you raise a fraction of the maximum rather than all of it. How the offering price was set when no market exists to set it. Any arrangement between the company and its officers that has not been fully described.

Plan in months rather than weeks, and structure the company's runway so it is not running out of cash while answering a third comment letter. Ask securities counsel for a schedule drawn from filings they have personally taken through qualification recently, not from an average.

The two tiers, and why the choice decides everything else

Regulation A contains two tiers. Each has its own annual ceiling on how much may be sold in a twelve-month period. Those ceilings have been raised before and can be raised again, so confirm the current figure with securities counsel rather than working from a number you read somewhere. The consequence of getting it wrong is an offering that has exceeded its own exemption, which is not a paperwork problem.

• Tier 1 carries the lower ceiling. It does not make audited financial statements a condition of the tier, and it does not start an ongoing Commission reporting obligation after the offering ends. What it does bring is the states. A Tier 1 offering remains subject to state securities qualification in every state where you intend to sell. A coordinated review programme exists to make a multi-state filing manageable, but it is still a second set of reviewers applying their own standards, and some states apply merit review, meaning a reviewer may object to the terms of the deal itself and not only to how you described it.
• Tier 2 carries the higher ceiling. State qualification is preempted for sales to qualified purchasers, which is why most nationwide offerings sit here. States keep their notice filings, their fees and their antifraud authority. In exchange, Tier 2 requires audited financial statements, imposes a limit on how much a purchaser who is not accredited may invest, measured against that person's income or net worth, unless the security is listed on a national exchange, and it starts an ongoing reporting cycle.

The trade reads clearly once it is stated plainly. Tier 1 is lighter at the Commission and heavier at the states. Tier 2 is heavier at the Commission and clears the states. A company selling into one or two states may genuinely be better off in Tier 1. A company running a national campaign almost never is.

Testing the waters

Regulation A permits something most exemptions forbid. You may solicit indications of interest from the public before the offering circular is filed, and continue afterwards, provided the materials carry the required legends and are filed as exhibits. No money may be accepted and no binding commitment may be taken until the offering is qualified.

This is a genuine advantage and it is routinely wasted. The point of testing the waters is to discover whether an audience that will actually subscribe exists, before you commission an audit and pay for a filing. Run it as a measurement rather than a warm-up. Count the indications. Count how many came from people who had never heard of the company. Be willing to stop on the result.

Everything published during that phase sits under the antifraud provisions. A claim made in a social post is no less actionable than the same claim in the offering circular.

What the investor ends up holding

This is the feature that separates Regulation A from a private placement, and the one most often skipped over.

Securities sold in a private placement are restricted securities. They carry a legend, they cannot be resold freely, and the holder waits out a holding period. Securities sold in a qualified Regulation A offering are generally not restricted. A purchaser may resell them, subject to the separate restrictions that apply to affiliates of the issuer and subject to there being a market to sell into at all.

Two things follow. First, liquidity is part of what you are offering, which is why the rule attracts companies with a consumer audience. Second, freely tradable stock spread across a large number of small holders is a real administrative undertaking. Tier 2 issuers are required to engage a registered transfer agent, and a conditional exemption from a separate Exchange Act registration threshold is available to Tier 2 issuers that meet its conditions, one of which is staying current in their Regulation A reporting. Understand those conditions before the offering closes, because falling out of them converts a reporting lapse into a much larger and more expensive problem.

The reporting Tier 2 brings with it

An ongoing cycle, none of it optional:

• An annual report on Form 1-K, carrying audited financial statements and an updated discussion of the business.
• A semiannual report on Form 1-SA, with unaudited interim financial statements.
• Current reports on Form 1-U for specified events, including a fundamental change in the business, bankruptcy, a change in control, a change of certifying accountant and certain unregistered sales of securities.
• An exit report on Form 1-Z when the offering terminates or the company suspends its obligation, where it is eligible to do so.

This is lighter than full Exchange Act reporting. It is not light. It commits the company to an annual audit indefinitely, and an audit is not a document you buy at the end of a year. It is a year of bookkeeping disciplined enough to survive one.

Note also what Tier 2 reporting is not. It does not make the company an Exchange Act reporting company. It does not list the shares anywhere. It does not satisfy an exchange's listing standards. A company that wants an exchange listing registers separately for that and accepts the governance requirements that come with it.

Liability, stated plainly

An offering circular is not a registration statement, so the specific liability section that attaches to a registration statement does not apply here. That is less of a reprieve than it sounds. A Regulation A offering is a public offering, and the provision covering material misstatements in a public offering does apply, alongside the general antifraud rule.

The practical reading is simple. Every figure, every claim about the size of a market, every reference to a contract that has not been signed, is a statement you may have to defend from your own records. Draft the offering circular as though someone will ask you to substantiate each sentence, because that is exactly where an examination starts.

Who Regulation A actually suits

• Companies with an audience. Consumer brands, membership businesses, anything with a customer list that already likes the company. A public offering has to be marketed to succeed, and that marketing is a real line in the budget.
• Companies that want non-accredited holders on purpose. If turning a customer base into a shareholder base is the strategy rather than a side effect, this is the rule that permits it.
• Companies with books that can be audited. Tier 2 requires an audit, and a company whose records cannot support one is not a candidate yet, whatever the business is worth.
• Asset and real estate programmes that need to raise repeatedly from a broad base and can describe what they own in terms a member of the public can follow.

Who it does not suit

• Anyone who needs the money this quarter. Qualification takes the time it takes and there is no accelerator you can buy.
• Companies that cannot fund the front end. The audit, counsel, the drafting and the marketing all land before the first investor dollar does.
• Issuer types the rule excludes. Eligibility is limited by where the company is organised and where it does business, and specific categories are disqualified, including blank-check companies, certain investment companies, issuers delinquent in their prior Regulation A reporting and anyone caught by the bad-actor provisions. Have counsel confirm eligibility in writing before you spend anything.
• Companies that want to stay quiet. Everything filed is public and permanent, including officer compensation and the transactions between the company and its insiders.

The order the work actually goes in

Confirm eligibility first, in writing. Engage the auditor early, because the financial statements are the long pole in every one of these and nothing downstream moves until they are done. Choose the tier based on where you actually intend to sell, not on the larger ceiling. Test the waters and read the result honestly. Draft the offering circular with counsel, file, and answer comments until the staff is satisfied. Qualify. Sell. Then start the reporting cycle on day one instead of discovering it eleven months later.

One closing observation, because it is where most of the disappointment lives. Regulation A does not create demand. It grants permission to ask the public, and asking the public is a distribution problem, not a legal one. A company with no audience running a qualified offering raises very little and has paid for the privilege. A company with an audience and an ordinary product often raises the full amount. Solve the audience before you solve the filing.

PRBE Capital works with owners at the decision point in front of all of this: whether a public offering is the right instrument for the raise at all, what the tier choice means for a company selling where it actually intends to sell, and what has to be true about the books before an audit is worth commissioning. The first conversation costs nothing and promises no approval.

This is an explanation of how Regulation A is structured, not legal, financial or securities advice; the tier ceilings, investment limits, eligibility conditions and reporting deadlines change over time, and the version that governs your offering is the one in effect when you file, so confirm every current requirement with securities counsel before relying on it.

Common questions

What is Regulation A+ and how does it work?

Regulation A is an exemption that lets a private company make a public offering of securities without a full registration statement. The company files an offering circular on Form 1-A, the Commission reviews it and qualifies it, and only then may the company accept money. Investors who are not accredited may participate.

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

Tier 1 has the lower annual ceiling, does not require audited financials as a condition of the tier, and remains subject to state securities qualification wherever you sell. Tier 2 has the higher ceiling, preempts state qualification for sales to qualified purchasers, requires audited financials, limits how much a non-accredited purchaser may invest, and starts ongoing reporting. Confirm the current ceilings with securities counsel, because they have been raised before.

Can non-accredited investors buy shares in a Regulation A offering?

Yes, and that is much of the point of the rule. In a Tier 2 offering, a purchaser who is not accredited is limited in how much they may invest, measured against their income or net worth, unless the security is listed on a national exchange. Tier 1 does not carry that federal investment limit but does carry state review.

Are Regulation A shares freely tradable?

Generally yes. Securities sold in a qualified Regulation A offering are not restricted securities in the way a private placement's shares are, so a purchaser may resell them, subject to the separate restrictions that apply to affiliates and subject to a market existing. That liquidity is a large part of why companies choose this route.

What ongoing reporting does Regulation A Tier 2 require?

An annual report on Form 1-K with audited financial statements, a semiannual report on Form 1-SA with interim financials, current reports on Form 1-U for specified events such as a change in control or a change of accountant, and an exit report on Form 1-Z when the offering ends. It is lighter than full Exchange Act reporting but it commits the company to an annual audit.

How long does it take to qualify a Regulation A offering?

Think in months rather than weeks. The filing is reviewed by staff who issue written comments, and each round of comments takes time to answer in an amended filing. The financial statements are usually the longest item, so engage the auditor before anything else and ask counsel for a schedule based on filings they have recently taken through qualification.

Is Regulation A the same thing as an IPO?

No. A Regulation A offering is an exempt public offering with an offering circular, not a registered offering with a prospectus, and completing one does not make the company an Exchange Act reporting company or list its shares anywhere. A company that wants an exchange listing registers separately and takes on the governance standards that come with it.