Following is an Article Top 10 Things You Should Know About Regulation A that I collaborated on with Steve Dresner, the CEO of Dealflow.com. It is being reprinted here with the permission of Dealflow.com. Sign up for Steve’s Series D blog here.
Top Ten Things You Should Know about Regulation A
There’s been a lot of talk about Reg A lately. I must receive an email a day pitching a deal, a webinar, or a legal whitepaper. Heck, there was more lip service given to Reg A than crowdfunding at the CfPA Crowdfunding Conference last month.
Given all of the enthusiasm – and confusion – surrounding Reg A, I thought it was fitting to offer a “Cliff Notes” version of what’s most important for you to know. I try to limit the word count in this blog and my good friend Lou Bevilacqua was kind enough to oblige by creating this “Top 10 List” for the short-attention-span crowd (like yours truly).
10. Issuers can use a Regulation A offering statement to cover shares issued in a merger.
The final rules do not limit the availability of Regulation A for business combination transactions, but, Regulation A would not be available for business acquisition shelf transactions, which are typically conducted on a delayed basis.
9. Regulation A is a viable path to becoming exchange listed.
Regulation A issuers that meet the listing requirements of a national securities exchange like NASDAQ Capital Market or NYSE MKT may become listed companies upon the closing of their Regulation A offering. These issuers can use Form 8A, a short form Exchange Act registration statement, to become an Exchange Act reporting company. Also, if a Regulation A issuer follows this path, the limitation on the amount a non-accredited investor may invest will not apply.
8. Previous reporting companies can use Regulation A.
A reporting company that properly files a Form 15 can thereafter use Regulation A for its securities offerings if it is otherwise eligible to do so.
7. A subsidiary of a public company can use Regulation A.
Although an Exchange Act reporting company (other than a voluntary filer) cannot use Regulation A for its securities offerings, its privately held subsidiaries can. Regulation A may be a novel way for public companies to tap into their customer base in order to fund operating subsidiaries through the sale of minority interests in those subsidiaries.
6. An issuer headquartered in the U.S. or Canada with operations outside of the U.S. or Canada may still use Regulation A.
Only U.S. and Canadian issuers may sell securities under Regulation A. However, an issuer is considered to have its “principal place of business” in the United States or Canada for eligibility purposes if its officers, partners, or managers primarily direct, control and coordinate its activities from the United States or Canada.
5. Although state securities law is preempted in a Tier 2 offering, an issuer may have to make notice filings.
State securities administrators cannot require registration or qualification of securities sold in a Regulation A offering, but they may require an issuer to make notice filings. Many states do require notice filings.
4. Voluntary filers can use Regulation A even though they are SEC reporting companies.
Regulation A is reserved for private companies. Voluntary filers are companies that have filed an S-1 and have satisfied their reporting obligation under Section 15d of the Exchange Act, but continue to voluntarily file SEC reports. These companies are eligible to use Regulation A to offer securities even though they file reports with the SEC and their securities may already be traded on an OTC market.
3. PCAOB audit firms are necessary as a practical matter.
Unless an issuer wants its securities to trade on the OTC Pink market, it should obtain a PCAOB audit. To have your securities listed on a national securities exchange or quoted on the OTCBB, OTCQB or OTCQX, a PCAOB firm will need to get involved.
2. An issuer may conduct an ongoing Regulation A offering.
So long as a Regulation A issuer is current in its reporting obligations under Regulation A (annual, semi-annual and current event reports), it can continuously offer securities under the same qualified Regulation A offering circular for up to three years, but it must file post-qualification amendments to update financial statements each year.
1. An issuer can “build a bridge” to its Regulation A offering.
At the same time an issuer is testing the waters for its Regulation A offering, it may raise working capital under a separate 506(c) private placement to cover the expenses of the offering or for any other purpose. An issuer might even sell bridge notes that convert at a discount to the pricing of its Regulation A offering.
If you’ve got questions about this list, you should reach out to Lou directly at email@example.com. If you’ve got questions or comments that aren’t of a legal nature, feel free to contact me as well.
I’ll be moderating a webinar on Reg A with Lou on February 9 at 2pm ET. Sign up using this free registration link.