Under Regulation A Tier 2 of the Securities Act of 1933, companies in the early stages of growth now have access to more capital. They can raise up to $75 million from both non-accredited and accredited investors, do general solicitation, and issue free-trading shares. Through the Reg A SEC filing and offering, a company can list its stock on a stock exchange and become a publicly-traded company. Companies can raise funding through Regulation A by themselves without a broker-dealer but may be required to register as an issuer dealer and issuer agent in several states. This article will discuss the pros and cons of using a broker-dealer for compliance versus issuers making the issuer dealer/agent filings themselves.
Does Federal Preemption of Reg A Tier 2 Offerings Protect the Company From Issuer Dealer/Agent Registration?
There are certain offerings, such as Reg A Tier 2, that allow for a more simplified filing process through federal preemption. Preemption refers to federal laws taking priority over state laws when it comes to interstate commerce. Under Section 18 of the Securities Act, states are required to refrain from prohibiting the registration or qualification of securities. States cannot deny an issuer the ability to sell securities in a state under Tier 2 of Reg A, however, issuers are still required to file Blue Sky notices including payment of fees. Further, it does not remove the broker-dealer or issuer dealer/agent registration requirements connected with making sales in certain states.If an issuer doesn’t utilize a broker-dealer, they must register as an issuer dealer or issuer agent in several states, depending on sales compensation and other factors.
There are some states where these additional requirements could be enforced. All issuers must register as issuer dealers if they are not using a registered broker-dealer in the following states:
Similarly, an agent of the issuer must register with the following states:
Companies must be aware of the dealer registration requirements of the states that require these filings if they wish to make sales to new investors in such states.
Drawbacks of Using Broker-Dealers for Reg A+ Compliance Only
Because of these requirements, companies might be thinking about working with a broker-dealer to handle registration so they don’t have to figure out the issuer dealer/agent filing requirements; however, there are a few drawbacks to working with a broker-dealer. They include:
Expenses: Broker-Dealers typically charge a minimum commission of 1-3 percent on the value of the securities being sold, even if the broker is doing compliance without making sales.
Additional Fees: There are $20,000 – $50,000 in administration and compliance fees that brokers charge on Reg A tier 2 offerings.
Additional FINRA Compliance: Brokers need to comply with FINRA requirements to prevent investigations, fines, and sanctions that could be handed down by FINRA. Broker-dealers must comply with requirements such as know-your-customer (KYC) documentation, state broker-dealer registration, broker-dealer exams, and due diligence requirements. Even though brokers are handling most of these duties, companies may need to be involved and be willing to pay additional compliance costs for such.
Time: Going through a broker-dealer could also take more time, dragging out the process while delaying the issuance of new securities.
Because of these reasons, companies that want to offer Tier 2 Reg A securities in the states listed above might simply wish to register as issuer-dealers themselves.
For Reg A+ Compliance Only
High Commission Fees (1-3%)
Additional Fees ($20,000 $50,000)
Extra FINRA Compliance
Why Companies Should Register as Issuer Dealers Instead of Using a Broker-Dealer
Even though companies can go through a broker-dealer, they may save time and money if they register as issuer-dealers (or agents of issuer-dealers) themselves. A few of the top advantages of companies registering as issuer-dealers include:
More Efficiency: If companies are able to do everything themselves, they can save time during the process, getting their securities issued faster.
Reduce Cost: Companies can also save money by paying a small amount to the states and an expert consultant that can help them navigate the issuer dealer requirements.
Streamlined Compliance: If companies comply with state requirements and issuer dealer filings themselves, they can eliminate the need to comply with FINRA’s requirements, as FINRA doesn’t regulate issuers, only broker-dealers.
Greater Transparency: By registering as an issuer dealer, companies can oversee everything themselves and know where they stand in the process.
Our expert state compliance consultants can provide guidance on the entire and often complex process of filing your Issuer Dealer and Agent Registrations for you. Get started today with your blue sky state filings by contacting us below.