Regulation A is an exemption from having to register securities with the SEC. It is a way of creating what we call “unregistered offerings”. You may also hear it called a “mini IPO.” The government instituted a change to the regulation through the Jumpstart Our Business Startups (Jobs) Act, so you may even hear people call it Regulation A Plus or Tier 1 or Tier 2. Of course, all of these refer to the same thing. But, for simplicity, we’ll call it Reg A.
Regulation A has its roots in the past, all the way back to the Great Depression. After the market crashed in 1929, Congress decided to remove the right to sell securities and then licensed those rights back. The goal was to protect investors from shady business dealings that marked the 1920s and led directly to the Great Depression.
These changes were eventually codified in what we know today as the Securities Act of 1933, which says that all securities sold in the United States must be registered with the SEC and applicable state securities regulators. Registration is time-consuming, expensive, and drawn-out, but it’s mandatory, even for smaller deals.
Regulation A in Detail
Now that we’ve covered other rules and regulations, as well as their pros and cons, it’s time to introduce Regulation A. You’ll find that it takes care of many of the negatives that marred the other fundraising options, but there are still a few caveats, including the fact that it doesn’t offer an unlimited amount of fundraising. Let’s walk through what you should know.
Let’s start with the fundraising limit for Regulation A. A quick Google search may reveal that the limit is $50 million. Unfortunately, however, that information is outdated. The current limit is $75 million.
In addition to the $75 million maximum raise limit, Regulation A allows you to publicly advertise for investors. There’s no requirement that you already have a relationship with your investors, which opens the door to all kinds of marketing options, including the following:
- Social media sites like Facebook and Instagram
- TV and radio spots
- Newspaper and other print materials
Finally, anyone can invest. There is no rule regarding accredited or unaccredited investors. In that regard, it’s similar to Regulation CF but with a much higher fundraising limit. However, that does bring us to a hurdle, and it’s something we’ve discussed in relation to other options: unaccredited investors can invest up to a certain percentage of their net worth or income. Investors are prohibited from putting more than 10% of the greater amount of their annual income or net worth into any one investment opportunity.
While some might chafe at yet one more rule, it’s there for a good reason: it offers a lot of protection. Imagine taking 10% of your total net worth and setting it all on fire (if the deal goes bad). That’s a significant loss, but at just 10%, it’s a survivable loss. If unaccredited investors could put a more substantial percentage into a deal, it’s possible that they would be wiped out if something went wrong.
Benefits of Regulation A
Having covered regulation A in depth, it’s time to take a closer look at the benefits. Here are a few of the top benefits Regulation A has to offer:
- Access to Capital: By offering securities to the public, companies can access a wider pool of investors who may be interested in investing in their business. This can provide the company with much-needed capital to grow their business.
- Reduced Regulatory Burden: Regulation A offerings are subject to less stringent regulatory requirements than traditional IPOs. This can reduce the cost and time involved in the offering process.
- Testing the Waters: Companies can gauge investor interest in their offering before going through the entire offering process. This can save time and money by allowing companies to determine if there is sufficient interest in their securities before investing in the full offering process.
- Increased Liquidity: Securities offered through Regulation A can be traded on secondary markets, which can increase the liquidity of the securities and potentially make them more attractive to investors
The Downsides of Regulation A
We’ve covered a lot of benefits relating to Regulation A. However, there are a couple of downsides that you should understand.
This is a higher-cost option. If you're only looking to raise $5 to $10 million, this is probably not the right choice for you. It's designed for those with much higher fundraising needs, and the cost is commensurate with that the additional process and regulatory requirements.
The other downside is the timeline involved. It takes longer to get your offering to the point where you can invite investors in and accept their money. You should plan on a timeframe of 3-6 three to six months. Some qualification processes may take even longer – up to a year in some instances. That means if you need money quickly, this is not the option for you. Instead, consider Reg D or Reg CF.
What is Regulation d Vs. Regulation a?
Now that we have a more comprehensive understanding of the potential advantages and limitations of Regulation A, it’s time to explore how it differs from Regulation D. While both regulations offer a means for companies to raise capital without registering with the SEC, there are significant differences between the two.
- Allows small businesses to raise up to $75 million in a 12-month period and follow certain reporting requirements.
- Companies must file offering statements with the SEC and follow certain reporting requirements.
- Securities sold under Regulation A are not restricted and can be freely traded by investors.
- Regulation A offerings can be advertised and marketed to the general public.
- Regulation A provides additional benefits, such as preemption of state securities laws and eligibility for secondary trading on national exchanges.
- Consists of two exemptions, Rule 506(b) and Rule 506(c), that allow companies to raise capital from accredited investors without having to register with the SEC.
- Under Rule 506(b), companies can raise an unlimited amount of capital from up to 35 non-accredited investors, while Rule 506(c) only allows accredited investors to participate.
- Companies must file a Form D with the SEC within 15 days of the first sale of securities.
- Securities sold under Regulation D are restricted and can only be sold to accredited investors or non-accredited investors with a pre-existing relationship with the company.
- Regulation D offerings cannot be advertised or marketed to the general public.
In summary, Regulation A and Regulation D are two different avenues for businesses to raise capital without having to register with the SEC. While Regulation A allows both accredited and non-accredited investors to participate and allows for public advertising and trading, Regulation D restricts sales to accredited investors and limits advertising and trading options. Both regulations have their own unique advantages and considerations for businesses looking to raise capital. To learn more about Regulation D (Reg D), click here.
Get in touch with us Today
Our Crowdfunding Lawyers team is here to assist you with navigating the complexities of Regulation A (Reg A) offerings. With our extensive knowledge and experience in crowdfunding and securities law, we can help you understand the requirements and regulations associated with Reg A, and guide you through the process of preparing and filing your offering with the Securities and Exchange Commission (SEC). Schedule your FREE consultation or contact us today at (469)-444-9999 to learn how we can help you achieve your fundraising goals through Reg A.