Regulation A + Capital Raising Basics

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On June 19, 2015, new rules expanding Regulation A became effective. The expanded rules are commonly known as Regulation A +. The new rules which were promulgated under the Jumpstart Our Business Startups Act (JOBS Act), create two Tiers of exempt offerings, both of which allow securities to be offered and sold to the general public.

Tier 1 offerings allow the issuer to offer and sell up to $ 20 million in a 12-month period. Tier 1 offerings do not preempt state Blue Sky laws. Tier 2 offerings allow the issuer to raise up to $ 50 million in a 12-month period. A notable advantage of Tier 2 over Tier 1 offerings is preemption of state Blue Sky laws. As discussed below, Tier 2 offerings require the issuer to provide audited financial statements and comply with ongoing reporting obligations.

Testing the Waters

Companies may solicit investor interest for a potential offering, both before or after the filing of their Regulation A + offering statement. Solicitation materials used after the offering statement is publicly filed, must be accompanied by a preliminary offering circular or provide a URL where the preliminary offering statement can be obtained. Additionally, materials used to solicit investors must be filed as exhibits to the Form 1-A offering statement.

Confidential Submission

A Company may submit its Form 1-A Offering Circular to the Securities and Exchange Commission (SEC) on a confidential basis before it is filed publicly so long as the documents are publicly filed not later than 21 calendar days before qualification by the SEC.

Disclosure Requirements

Companies conducting Regulation A + offerings must file an offering statement on Form 1-A with the Securities & Exchange Commission. The form must be filed through the SEC's EDGAR system. Form 1-A Offering Circulars have three parts:

Part I (Notification),

Part II (Offering Circular), and

Part III (Exhibits).

The Offering Circular disclosure in Part II of Form 1-A is similar to what is required by a Form S-1 registration statement under the Securities Act. The disclosure requirements for Tier 1 and Tier 2 offerings vary slightly.

The following disclosures are required:

Basic information about the company, the offering and underwriters, if any,

Underwriting discounts and commissions,

Summary of risk factors,

Material differences between the offering price and the amount paid for shares by insiders during the past year,

Plan of distribution,

Selling security-holders,

How offering proceeds will be spent,

Business operations for the prior three fiscal years or since inception, if less than three years,

Physical property / real estate,

Management's discussion and analysis of the company's liquidity and capital resources and results of operations,

Directors, executive officers and significant employees of the company,

Executive compensation,

Beneficial ownership by officers, directors and 10% owners,

Transactions with related parties, promoters and certain control persons, and

Material terms of the shares being offered.

Financial Statement Requirements For Regulation A +

Tier 1 and Tier 2 offerings require the company to provide financial statements for the two most recent fiscal years. An important distinction between Tier 1 and Tier 2 offerings is that Tier 2 companies must provide audited financial statements, while Tier 1 companies may provide unaudited financial statements.

US based companies must prepare their financial statements in accordance with US Generally Accepted Accounting Procedures (GAAP), while Canadian companies may prepare their financial statements in accordance with either US GAAP or International Financial Reporting Standards of the International Accounting Standards Board (IASB IFRS).

Delivery Of The Offering Circular

During the pre-qualification period of Regulation A + offerings, companies must provide a preliminary offering circular to prospective investors at least 48 hours before the sale. When a company is subject to ongoing Tier 2 reporting obligations and current in its obligations, delivery of a preliminary offering circular is not required. Under these circumstances, the company and any intermediaries are subject to the general offering circular delivery.


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