Regulation A+ (“Regulation A+”), also known as the “mini IPO”, is an alternative to the traditional IPO, through Form S-1, as filed to the Securities and Exchange Commission (“SEC”). Regulation A+ was passed into law to encourage small businesses to raise capital, by removing restrictions that limited access to private investor funds. Regulation A+ became effective on June 19, 2015.
The Form S-1 is the initial registration statement for new securities required by the SEC for public companies. The S-1 is filed to the SEC prior to listing the registered securities on a public stock exchange. In doing so, the S-1 provides the SEC and prospective investors with disclosure surrounding the company’s business, financial statements, potential risks, planned use of capital proceeds, competition and provides a brief prospectus of the planned security itself, offering price methodology and any dilution that will occur to other listed securities. In a traditional S-1, it is important to keep in mind of the following disclosure requirements:
Audit of financials by PCAOB certified auditor
Sarbanes-Oxley reporting requirements
Unrestricted, free trading securities
Unlimited offering amount
Reg A was amended into Regulation A+ through Title IV of the JOBS Act via SEC rule on March 25, 2015. Its amendments included two tiers to the rule which allow issuers to raise up to $20 million in a 12-month period for Tier 1 and $50 million for Tier 2.
Advantages of Reg A+ over S-1
Regulation A+ is widely regarded as an improvement as it reduces requirements for small companies, making it an easier and less costly option to raise money and perform an IPO onto an exchange or resume normal business as a private company after the offering is completed. Here are the benefits of using Regulation A+ over the S-1:
Scaled-down disclosure requirements on Form 1-A which result in faster filing and reduced attorney and audit costs. The process for getting qualified is far simpler.
Audit requirements do not require PCAOB certification for issuers listing on OTCQB or OTCQX; however, it is required for issuers to list on major exchanges such as NASDAQ or NYSE.
Not subject to Sarbanes-Oxley reporting requirements unless the company elects to become a fully reporting issuer.
Can elect to become a fully reporting issuer at anytime; although, it is not required for OTCQB and OTCQX listed companies.
Companies can list their offering on a crowdfunding portal or sell their securities directly on their website as seen in this solution. This provides greater media and marketing exposure. In the case of company consumer products, the inherent Regulation A+ process of marketing to thousands of investors has positive effects on the company and the perception of its brand.
Companies can “test the waters” and solicit indications of interest from the public long before attorneys and accountants prepare the company’s offering. A company with a consumer-based business model and an existing network of potential users could easily test the efficacy of a Regulation A+ campaign before collecting any money from investors.
Companies can do a resale of private offering securities of up to $15 million to seek trading for already issued shares as its method of going public or add that to an IPO. The rule allows a resale of up to $15 million worth of stock each year, so a private offering is followed by Regulation A resale offering may become a very attractive way to go public.
State securities registration is pre-empted on Tier II offerings, where it is not pre-empted on Tier I and S-1 offerings (unless the company is listed on NASDAQ or NYSE). This may be the greatest advantage of using Reg A+ over an S-1.
Disadvantages of Reg A+ compared to S-1
Although there are mostly advantages of doing Reg A+ over the S-1, here are the disadvantages:
Offering amounts are limited to $20 million for Tier 1 and $50 million for Tier 2; whereas the S-1 maintains an unlimited offering amount.
Smaller reporting companies (SRC) can utilize the S-1 over Reg A with not many additional disclosure requirements on the S-1. Note, SRC’s are required to file quarterly reports where Reg A companies are not.
Issuers lose the benefit of mandated institutional investor disclosure in Schedule 13D and 13G.
Non-accredited investors are subject to investment limitation provisions of no more than 10% of the individual’s net worth unless the purchaser is an accredited investor or the securities will be listed on a national exchange upon qualification, whereas the S-1 contains no such provision.
Rules that apply to Offering Circular may receive the same level of scrutiny in S-1 offering. However, typically, reviews and SEC comments are shorter and easier to get through than S-1s.
Benefits of S-1 and Regulation A+ offerings over private offerings
Performing a public offering through S-1 or Reg A+ contains many benefits over private offerings:
Confidential filings of the S-1 or 1-A is beneficial for companies to protect information leaking to the public. Companies can keep registration statement filings confidential until 15 days before roadshows. This protects their business model and plans from competitors and market fluctuations that can harm the offering and shareholders.
Ability to trade securities on an exchange and provide liquidity to investors.
Securities issued include free-trading securities, unlike private offerings which only allow restricted securities.
An offering can be granted to the general public using general solicitation. Private offerings using general solicitation, under Rule 506(c), require issuers to take reasonable steps to determine if investors are accredited. 506(b) does not allow general solicitation.
Issuers in Reg A+ and S-1 offerings can rely on investors to self-certify their accreditation status, while there is no limit to the number of non-accredited investors. Reg D private offerings, under Rule 506(c), do not allow sales to non-accredited investors while 506(b) offerings allow 35 non-accredited investors.
Preparations for a Regulation A+ offering
There are many steps required in a Regulation A+ offering and if not carefully planned for in advance may sink the ability to properly get listed onto the stock exchange of choice.
Rather than solely focus on the offering itself, issuers should have a streamlined plan, post-offering, about how they intend on using funds as outlined in Use of Proceeds in the 1-A.
Issuers should prepare financial statements for two years for their audit.
Issuers should ensure the proper staff is in place to manage the offering including investor relations, ongoing financial reporting duties, and legal counsel. Even if you obtain one or two of the following experienced staff members, that will help greatly: investor relations, VP of finance, controller, CFO, and CEO. Smaller public companies should strongly consider outsourcing their securities legal counsel.
Issuers should consider liquidity concerns and exit strategies: staying private, M&A, exchange listing, etc.