Regulation A, Testing the Waters
Regulation A is an exemption for public offerings not exceeding $5 million in any 12-month period.[1] It is the SEC “test the waters” exemption that allows small company offerings to be conducted in compliance with state laws to determine market interest before going through the expense of filing with the SEC. The offering circular must be pre-filed in every state in which a test-the-waters offer will be made, giving the states the opportunity to comment on the disclosure proposed or the merits of the offer or the issuer, and when finally approved, the offer can be advertised in each state where it has been approved, if state law so allows. [2]
A Regulation A offering is often referred to as a “mini-registration” or “mini public offering,” as it shares many characteristics with registered offerings. For example, the issuer must provide purchasers and the SEC with an offering circular, similar to a prospectus in a registered offering; the securities can be offered publicly, using general solicitation and advertising, and are not restricted securities.[3] There are, however, some differences between Reg A offerings and registered public offerings. For example, in Reg A offerings, financial statements are simpler and not audited and the issuers normally do not incur ongoing reporting obligations.[4]
While Regulation A can be a useful tool for companies that want to test the waters, due to the relatively low offering threshold and state scrutiny, not to mention the requirement for an offering circular, it has not been the most attractive option for exemption. As the SEC acknowledges, issuers rarely rely on Regulation A to raise capital for a number of reasons.[5] In calendar years 2012 to 2014, for instance, only 26 Regulation A offerings, excluding amendments, were qualified by the agency.[6] In our next post, we will discuss Regulation A reform efforts that resulted in the new Regulation A+.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] See 17 C.F.R. § 230.251–.263.
[2] Russell C. Weigel, III, Capital for Keeps: Limit Litigation Risk While Raising Capital, at 69.
[3] SEC, Small Business and the SEC: A Guide for Small Businesses on Raising Capital and Complying with the Federal Securities Laws, http://www.sec.gov/info/smallbus/qasbsec.htm#rega (last visited Apr. 9, 2015).
[4] Id.
[5] 80 Fed. Reg. 21,806, 21,868 (Apr. 20, 2015).
[6] Id.