Regulation A, also known as Reg A/+, is a securities law that allows companies to offer and sell securities to the public without having to register with the Securities and Exchange Commission (SEC) under certain circumstances. In this article, we’ll discuss what regulation A is, what types of securities can be offered, and what the benefits and drawbacks are of using this exemption.

What is Regulation A?

Regulation A is a securities law that provides an exemption from registration requirements for certain securities offerings. The SEC amended Reg A in 2015, Reg A+, creating two tiers: Tier 1 and Tier 2. Tier 1 offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 offerings allow companies to raise up to $75 million in a 12-month period.

What Types of Securities can be Offered?

Reg A allows companies to offer and sell equity, debt, and convertible securities to the public. The most common securities offered under Reg A are common stock and preferred stock. However, companies can also offer other types of securities, such as warrants and options.

Benefits and Drawbacks of Reg A

There are several benefits and drawbacks to using Reg A for securities offerings.

Benefits:

1. Reduced Cost: Reg A offerings are generally less expensive than traditional public offerings because they are exempt from SEC registration requirements.
2. Access to Capital: Reg A offerings can provide companies with access to capital that they may not have been able to raise otherwise.
3. Increased Liquidity: Reg A offerings can provide companies with increased liquidity, as their securities can be freely traded on the secondary market.

Drawbacks:

1. Disclosure Requirements: Companies must provide certain disclosure documents to potential investors, such as an offering circular, which can be time-consuming and costly to prepare.
2. State Blue Sky Laws: Reg A offerings are still subject to state securities laws, which can be complex and vary by state.
3. Limited Marketability: Although Reg A securities can be traded on the secondary market, there may be limited marketability, which can affect the value of the securities.

Conclusion

This only scratches the surface. While, Regulation A can provide companies with an alternative way to raise capital through securities offerings without having to register with the SEC, consulting with an experienced securities attorney can help you navigate the regulatory requirements and determine whether Reg A+ is the right choice for your offering.

Every river begins with a source. So too does every great American corporation begin with a source of funding. The rivers of finance have been shaped and guided by our legal system, perhaps most famously by the Securities Act of 1933. Among its many currents is one that meanders less publicly, a tributary often overlooked in the bustle of Wall Street’s rushing rapids: Section 4(a)(2), the section that exempts certain transactions from the rigors of the public offering process.

The Securities Act of 1933, passed in the wake of the stock market crash of 1929 and during the grim days of the Great Depression, was designed to foster transparency in the financial system and protect investors from deceptive practices. The Act mandated that securities offered or sold to the public had to be registered, providing potential investors with the necessary information to make informed decisions.

But nestled within the Securities Act is Section 4(a)(2), a provision designed not to open the waters to all, but to create a quieter, private stream where selected individuals can invest. It is this section that exempts transactions “by an issuer not involving any public offering” – the private placement – from the Act’s registration requirements.

Understanding private placement and the interplay of Section 4(a)(2) requires navigating the meandering streams of securities law. A “private placement” under Section 4(a)(2) is an offer and sale of securities by an issuer to a select group of investors. As these transactions do not involve a public offering, they need not navigate the rigorous, often expensive, process of registration.

However, the waters of Section 4(a)(2) are not unbounded. To ensure the provision is not misused, the courts and the SEC have established certain criteria to define what truly constitutes a non-public offering. These include the relationship between the issuer and the offerees, the number and type of the offerees, the size and manner of the offering, and the economic ability of the offerees to withstand the potential loss of their investment.

Like any other section of the Securities Act, the voyage through Section 4(a)(2) carries its risks. Issuers must carefully tread these waters, mindful of the inherent tension between the desire to raise capital and the need to comply with securities laws. A misstep may lead to regulatory enforcement actions and penalties.

At its heart, Section 4(a)(2) represents a pragmatic balance struck by the architects of the Securities Act. It acknowledges the reality that not all securities transactions require the scrutiny designed for large-scale public offerings. It permits issuers, particularly smaller ones, to access capital without the burden of a full public offering, while also protecting investors by ensuring they are sufficiently sophisticated to evaluate the risks.

As we continue to navigate the shifting currents of our financial markets, it remains essential to understand and appreciate the diverse channels of capital formation embedded within our securities laws. Amidst the rapids of public offerings, let’s not forget the tranquil, yet vital stream of private placements offered by Section 4(a)(2). For it is in these quieter waters that many of our most innovative companies find their source of sustenance, and begin their journey to join the great river of American enterprise.

Regulation A, also referred to as Reg A, provides a small offering exemption from registration for public securities offerings and was updated to be more accessible to small and midsize companies. This change was meant to provide a more effective capital-raising tool while still providing essential protections to investors.

Regulation A is divided into two offering tiers: Tier 1 and Tier 2. Both tiers have their own advantages and distinct requirements.

Tier 1: is for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.

Tier 2: is for offerings of securities of up to $75 million in a 12-month period, with not more than $22.5 million in offers by selling security-holders that are affiliates of the issuer. Companies can choose to proceed under the requirements for either tier for offerings up to $20 million.

Common requirements for both Tier 1 and Tier 2 offerings include certain issuer eligibility criteria (e.g., the issuer must be organized under the laws of a state or territory of the United States or the District of Columbia), bad actor disqualification provisions, and the requirement to file offering statements and reports with the SEC.

However, Tier 2 has additional investor protection requirements compared to Tier 1. For instance, there are limitations on the amount a non-accredited investor can invest in a Tier 2 offering — no more than 10% of the greater of annual income or net worth for individuals and 10% of the greater of annual revenue or net assets at fiscal year-end for entities.

Tier 2 offerings also necessitate audited financial statements and ongoing reports, including annual reports, semiannual reports, and current event reports. One of the main benefits of Tier 2 offerings, though, is that issuers are not required to register or qualify their offerings with state securities regulators, which is a process known as “blue sky laws.” This federal preemption can save issuers time and money.

While Regulation A can be an attractive fundraising tool, companies should carefully consider the costs and benefits before proceeding. They must comply with regulatory requirements and ongoing reporting obligations. Additionally, securities sold in a Regulation A offering, like all securities, carry a risk of litigation or enforcement action if things go wrong. Therefore, it is advisable to seek legal advice when contemplating a Regulation A offering.

The U.S. Securities and Exchange Commission (SEC) has set guidelines to disqualify so-called “bad actors” from participation in securities offerings. These disqualifications apply to individuals or entities with a history of securities law violations or related legal issues. The criteria for disqualification include:

1. Criminal convictions related to securities transactions, false SEC filings, or specific securities-related businesses.
2. Court injunctions or restraining orders related to securities transactions, false SEC filings, securities-related business activities, or obtaining money or property through false representations.
3. Final orders from certain financial regulators barring the individual or entity from associating with a regulated entity, engaging in specific financial business activities, based on violation of antifraud rules, or any postal service false representation order.
4. SEC orders revoking the registration of a regulated person, limiting their activities, or imposing industry, collateral, or penny stock bars.
5. SEC cease-and-desist orders related to the antifraud rules based on fraudulent intent or violations of Section 5 of the Securities Act.
6. Suspension or expulsion from a self-regulatory organization such as the Financial Industry Regulatory Authority (FINRA).
7. For any registrant, issuer, or underwriter named in any registration statement or Regulation A offering statement filed with the SEC, the issuance of a suspension or stop order with respect to such statement, or any ongoing investigation related to these issues.

In simpler terms, individuals or entities with a history of legal issues or violations in securities transactions, as outlined above, could be considered “bad actors” by the SEC and may be barred from participating in securities offerings.

Under Michigan law, innocent misrepresentation is incompatible with the Seller’s Disclosure Act, with the exemption from liability afforded by MCL 565.955(1) with respect to a disclosure made on an SDS. Roberts v Saffell, 280 Mich App 397, 414; 760 NW2d 715 (2008), aff’d 483 Mich 1089; 766 NW2d 288 (2009).

The Seller Disclosure Act requires sellers of residential real estate to disclose certain known defects to potential buyers. The Act requires the seller to disclose defects in the property that are known to them. If a seller fails to make the required disclosures, a buyer has a right to terminate the contract.

In summary, while it is generally not possible to recover damages based on an innocent misrepresentation theory for statements made in a seller’s disclosure statement under the Seller Disclosure Act, there may be other theories of recovery available to buyers in certain circumstances. It is important to consult with an experienced attorney to determine the best course of action.