Companies seeking to raise capital using an alternative to a traditional initial public offering (“IPO”) can explore an offering under Regulation A, as amended (“Reg A+”). Reg A+ offerings resemble traditional IPOs, but with scaled disclosure requirements. Reg A+ can be used by issuers organized and with their principal place of business in the U.S. or Canada, except for investment companies and certain disqualified companies.
Companies can choose between two tiers of offerings limited by the amount that can be raised in any 12-month period: Tier 1 offerings for up to $20 million and Tier 2 offerings for up to $75 million. Tier 1 offerings have no investment limitations, while Tier 2 offerings have investment limitations for investors that are not “accredited investors.” Companies undertaking a Reg A+ offering can engage an investment bank to serve as a placement agent to facilitate investment in the offering or can sell their own securities.
Companies considering whether to use Reg A+ should keep in mind that Reg A+ offerings resemble traditional IPOs and can take a long time to complete. The offering statement on Form 1-A is subject to review and qualification by the Securities and Exchange Commission (the “SEC”), which can take up to six months or more, depending on the SEC’s review and the company’s preparedness for public reporting.
Pros:
- Scaled disclosure requirements – Disclosure requirements for Reg A+ offerings are less extensive than a traditional IPO and ongoing interim reports are required semi-annually as opposed to quarterly for Exchange Act reporting companies.
- Tier 2 offerings preempt state registration – State registration and qualification provisions are preempted in Tier 2 offerings.
- Increase retail ownership – Reg A+ offerings typically attract retail investors as opposed to institutional investors and can provide issuers with an opportunity to grow their shareholder base.
- Securities not restricted – Securities issued in a Reg A+ offering are not restricted and can be freely sold by non-affiliates of the issuer, subject to applicable blue sky laws.
- General solicitation and “testing–the-waters” – Reg A+ permits general solicitation and allows issuers to solicit investor interest prior to filing an offering statement.
Cons:
- Must begin publicly reporting – Reg A+ issuers must file annual, semiannual, and current reports, similar to traditional Exchange Act reports. While these reports are not as extensive as Exchange Act reports, the Reg A+ issuer will incur additional operating expenses to prepare these reports, regardless of how much capital is raised in its Reg A+ offering.
- Tier 1 offerings do not preempt state laws – Tier 1 issuers must register or qualify the offering with each state securities commission in which securities will be sold prior to the sale of any securities in that state. This process can be expensive and time-consuming.
- Compliance with blue sky notice and fee requirements for Tier 2 issuers – Tier 2 issuers are still subject to notice and filing fee requirements in the states where securities will be sold, even though state registration or qualification is preempted.
- Could trigger Exchange Act reporting – Reg A+ issuers will become subject to reporting under Section 12(g) of the Exchange Act if they gain over a certain number of shareholders or annual revenue.
- Potential roadblocks with national securities exchanges – National securities exchanges have historically been skeptical of companies that have raised funds through Reg A+ because of their limited ability to meet quantitative and qualitative requirements of the exchanges.
Before structuring a Reg A+ offering, a company should consider:
- What the major driver is for accessing the public capital markets:
- If the company’s goal is to increase liquidity in its shares or attract institutional investors, Reg A+ may not be the right path because of the difficulty in listing on a national securities exchange concurrent with or after the offering.
- Reg A+ offerings appear to be most successful in certain industries, such as real estate.
- How quickly the company needs capital:
- Reg A+ offerings can take several months to be qualified by the SEC and, even after qualification, funds may not be raised immediately.
- If a company is seeking funds over a longer time horizon, Reg A+ can be a good choice.
- If a company needs to raise capital quickly, a private placement under Regulation D may be a better choice.
- Reg A+ offering or traditional IPO:
- While the timeline for a Reg A+ offering is slightly shorter than a traditional IPO, it still takes several months to complete, which is much longer than private offerings.
- Reg A+ offerings may be better suited for companies looking to sell their own securities or real estate investment trusts that do not plan to list their securities on a national securities exchange in the near-term.
- A traditional IPO may be better for companies that seek a listing on a national securities exchange and the support of industry professionals who can advise on navigating the offering process.
If you have any questions about Reg A+ offerings, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.