Regulation A

Regulation A, also known as Reg A, refers to an exemption that allows companies in the United States to sell or offer securities publicly without first registering with the Securities and Exchange Commission (SEC). Exempted companies receive certain advantages over non-exempted ones, especially regarding documentation.

Companies can be exempt under two tiers – 1 and 2. The Regulation A classification concerns the maximum value of securities the company can offer in 12 months. However, despite the exemption from registering, companies still have to file the offering statement with the SEC.

• Regulation A offering can be defined as an exemption to the federal requirement that companies issuing their shares to the public should first register with the SEC.
• The exemption primarily seeks to simplify the documentation and procedures for small and medium-sized companies so that they can quickly raise capital from the public.
• To qualify for this exemption, the companies have to raise capital worth less than $75 million. Based on this, they will be categorized into two tiers – Tier 1 with a maximum value of $20 million and Tier 2 with $75 million.

Regulation A exemption is an essential incentive for small and medium-sized companies to raise capital by publicly offering their shares. It alleviates the stringent requirements that are often associated with trading publicly. According to the Securities Act of 1933, firms that wish to be publicly traded should register with the SEC.

In June 2015, Reg A was updated to Regulation A+, which specifically categorized the exemption-seeking companies into two categories – Tier 1 and 2. Companies that have offered a maximum of $20 million within 12 months qualify as Tier 1 companies. Businesses that have offered a maximum of $75 million are Tier 2 companies.

The classification is made further to simplify the paperwork and procedures for small businesses. For instance, Tier 1 companies do not have to audit their financial statements, while Tier 2 companies are required to do so. Also, Tier 1 companies do not have any restrictions related to non-accredited investors, while those trading in Tier 2 companies can invest a maximum of 10% of their net worth or income.

Another crucial point to note is that the SEC must review and qualify these companies before they can accept payment for the offer or sale of securities. However, state securities regulators can review and qualify Tier 1 companies but not Tier 2 companies. The requirements for tier 1 and 2 companies are discussed in the next section.

SEC Regulation A allows traders to invest in small and mid-sized companies, who might otherwise not consider public offering as an option due to the procedure-intensive registration with the SEC. However, investors should remember that the risk exposure remains the same, regardless of whether a company is registered with the SEC.

Though companies with Regulation A exemption do not have to register with the SEC, they must comply with some requirements.

#1 – Tier 1 and 2 companies

• Form 1-A: All companies must submit their offering statement to the SEC. It includes the offering circular and any other disclosure relating to the offering.
• Form 1-Z: Companies should file their exit report detailing the offering’s termination or completion.

#2 – Tier 2 companies

• Form 1-K: This includes the annual report that should be filed within a maximum of 120 days after the fiscal year. The annual report should contain audited financial statements, the company’s financial results, information about the business and management, share ownership, and related-party transactions. Also, Tier 2 companies submitting Form 1-K can include the relevant information from Form 1-Z and file them as one.
• Form 1-SA: This semi-annual report should be filed within 90 days after the semi-annual period. It includes unaudited interim financial statements and the company’s financial results.
• Form 1-U: The current report is filed within four business days after certain events such as bankruptcy, change in control and departure of officers, non-reliance on prior financial statements or audit reports, fundamental change, and change in accountant have occurred.

Regulation D and A relieve small businesses of the obligation to register with the SEC before publicly issuing shares. But particular distinctions between the two exist:

• The principal difference is that Regulation D mainly applies to accredited investors, whereas Regulation A applies to accredited and non-accredited investors. Accredited investors can trade securities that are not registered with the financial authorities.
• Reg A requires the SEC to review and qualify the offering. However, there is no such requirement under Reg D. However, this does not free the company from maintaining proper financial statements and documents.
• Reg D is considered faster and cheaper than Reg A. Though Reg A carries a simplified procedure compared to what is usually done, Reg A still requires the company to file the offering statement and exit report.
• Companies prefer Reg A as Reg D requires companies to have access to accredited investors.
• Only 35 non-accredited investors can trade under companies exempt by Reg D as per law. The only restriction under Reg A is that the non-accredited investor should invest less than 10% of their income in the company.

This article has been a guide to what is Regulation A. Here, we explain its with its requirements and compare it with Regulation D. You may also find some useful articles here -

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