Did you know that the Reg A exemption can be thought of as two separate exemptions wrapped up into one?
This post is part of an ongoing series exploring the basics and not-so-basics of Regulation A. You can find other posts in the series here. Contributions to this article made by Zachary Fallon, James Blakemore, Julian Russo, and Jenny Leung.
Reg A is an exemption from registration under the Securities Act of 1933 (the “Securities Act”) that allows companies to publicly offer and sell securities in two similar, yet meaningfully distinct, ways:
- Tier 1: for securities offerings of up to $20 million in a 12-month period; and
- Tier 2: for securities offerings of up to $50 million in a 12-month period.
Under both tiers, companies are subject to the same basic eligibility and bad actor disqualification requirements, as well as substantively similar disclosure requirements.
Companies planning to issue up to $20 million in securities may elect to proceed under the requirements of either Tier 1 or Tier 2. Compared with Tier 1, Tier 2 offers both additional advantages and obligations. While companies in Tier 2 offerings can offer and sell over $20 million in securities and, unlike under Tier 1, are not required to have their offering statement qualified and registered in each state that they plan to offer and sell their securities, they are subject to audited financial and ongoing reporting requirements, as well as investor limitations.
Preemption of State Securities Law
A company that offers securities pursuant to Tier 1 will need to have its offering statements qualified by state securities regulators in each state in which it intends to offer and sell its securities. This is in addition to the requirement that the offering statement be qualified with the Securities Exchange Commission (“SEC”).
By contrast, a company’s offering statement in a Tier 2 offering does not need to be qualified by state securities regulators. This is because securities offered and sold in Tier 2 offerings are considered “covered securities” for purposes of Section 18 of the Securities Act, which results in the preemption of state securities law registration and qualification requirements with respect to their offer and sale. Preemption notwithstanding, state securities regulators retain the authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees.
The ongoing reporting requirements are different for issuers under Tier 1 and Tier 2. Companies offering securities under Tier 2 are subject to the following ongoing reporting requirements:
- Semi-annual report (Form 1-SA)
- Annual report (Form 1-K)
- Current report (Form 1-U)
- Exit report (Form 1-Z) (on suspension of a Tier 2 issuer’s obligation to continue filing ongoing reports)
Companies offering securities under Tier 1, on the other hand, do not have any ongoing reporting requirements other than final exit report Form 1-Z, which is to be filed not later than 30 days after termination or completion of an offering.
Non-accredited investors in Tier 2 offerings are subject to investment limitations of no more than (a) 10% of the greater of annual income or net worth (natural persons); or (b) 10% of the greater of annual revenue or net assets at fiscal year-end (non-natural persons). This limit does not apply to accredited investors or to purchases of securities listed on a national securities exchange. Investors of Tier 1 offerings face no such limitation.
As part of the offering statement, both Tier 1 and Tier 2 issuers must provide financial statements for the two previous fiscal year ends (or shorter if they have not been in existence for two years). The financial statements must be dated not more than nine months before the date of non-public submission or filing.
For Tier 1 offerings, the financial statements do not need to be audited, unless the issuer has already prepared audited financial statements for other purposes. Tier 2 issuers on the other hand are required to include audited financial statements.
Companies interested in publicly offering and selling securities but for whom the costs of the registration process do not make sense have Reg A at their disposal. Reg A Tier 1 and Tier 2 offering requirements are similar and based on the same general disclosure requirements. The way in which offerings made pursuant to the respective tiers are regulated, however, including implications under state securities laws and associated ongoing reporting obligations, are meaningfully different.
If you are considering conducting a Reg A offering and are unsure which tier is suitable for your company, give us a call.