#1 Did You Know: Eligible Issuers
Did you know that Reg A Offerings are limited to companies organized in and with their principal place of business in the U.S. or Canada?
This post is part of an ongoing series exploring the basics and not-so-basics of Regulation A. You can find part two of the series here. Contributions to this article made by Zachary Fallon, James Blakemore, Julian Russo, and Jenny Leung.
Regulation A (“Reg A”)[1] is a great way for smaller companies to raise funds through the sale of securities — up to $50 million a year — including companies wishing to issue securities tokens. It offers a number of benefits to such companies, including the ability to (1) sell unrestricted (i.e., freely transferable) securities (2) on a continuous basis over time (3) to a variety of investors, regardless of their income or wealth (4) without having to register the securities at a state-by-state level.
But Reg A is not available to every company that might find these benefits attractive. So, who can use Reg A?
Your Company Must Be U.S. or Canadian.
Reg A is “limited to companies organized in and with their principal place of business in the United States or Canada.”
“Organized in” — A company is “organized in” the United States or Canada if its articles of incorporation or other corporate formation documents were drawn up and, where necessary, filed according to the law of a state or territory of either of those countries.
“Principal place of business” — A company has its “principal place of business” in the United States or Canada if the company’s officers, partners, or managers primarily direct, control, and coordinate the activities of the company in a state or territory of either of those countries.
Not All U.S. or Canadian Companies Can Use Reg A.
Reg A places additional limits on the types of companies that can use Reg A to issue securities. Among others, Reg A is not available to companies that are:
Blank check companies
Blank check companies are development-stage companies that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Business development companies (BDCs)
A BDC is a closed-end company that, among other things, invests in certain kinds of securities and offers the issuers of those securities significant managerial assistance.
Bad actors
Bad actors include issuers or other “covered persons,” including officers or beneficial owners of issuing companies, that have been subject to a relevant criminal conviction, regulatory or court order, or other similar event.
Often, though not always, these disqualifying events involve prior violations of the securities laws.
Subject to certain orders of the SEC
This includes certain orders denying, suspending, or revoking registration of securities under Section 12(j) of the Exchange Act.
Registered or required to be registered under the Investment Company Act of 1940
This includes companies that fall under the definition of an investment company — an issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in “securities.”
Issuers of certain natural resources-based securities
Issuers that have used Reg A in the past but have not met its reporting requirements
If your company is U.S. or Canadian and none of these situations applies, Reg A may be an attractive route for your company to raise money through the sale of securities.
Eligibility and Other Aspects of Reg A Could Change.
One final thing to note: while Reg A is one of the oldest securities laws exemptions, it was relatively recently substantively revised (in 2015), and the SEC is currently considering what additional types of companies, if any, should be able to use Reg A going forward.[2] For the most up-to-date information, or if you think Reg A might be right for your company, be sure to consult your attorney.
Endnotes
[1] Regulation A is an exemption from registration under the Securities Act of 1933 for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
