What is a Regulation A Offering?

Regulation A is an exemption that eliminates one of the chief challenges entrepreneurs face when they went to offer or sell a security: it permits those offerings to go forward with either of two different levels of sales with easier SEC registration requirements. Though the disclosures that Regulation A requires are similar to those of registered offerings, the processes for each of the two tiers are significantly less burdensome, and offer the benefit of being able to raise up to $75 million (Tier 2) in a 12-month period via direct public offerings.

Tiers 1 and 2 of the Regulation A exemption both permit companies to raise funds by offering and selling securities without registering with the SEC. Both require that an offering statement including the offering circular be filed with the SEC using Form 1-A and that investors must be given that circular or know how to access it. No payments for the sale of securities can be accepted under either tier until this qualification has been provided. Beyond those similarities, each tier has its own limits, requirement and restrictions.

Tier 1 permits the company to raise up to $20 million in any 12-month period. Beyond the SEC qualification, companies offering securities under Tier 1 rules also need to have their offering qualified by the state securities regulators in the states where they plan to sell their securities. One of the biggest advantages of Tier 1 is that it carries no reporting requirements beyond the final report on the offering’s status.

Tier 2 permits the company to raise up to $75 million in any 12-month period. Importantly, the rules of Tier 2 offerings do not require qualification by state securities regulators, though companies do have reporting requirements, which are ongoing. If the securities to be sold will not be listed on a national securities exchange then investors either have to be accredited or are subject to a limit of 10% of the greater of annual income or net worth, not including the value of their primary residence and any loans that it secures up to its values. 

One of the most important benefits that the Regulation A exemption offers is that by making an offering using the Tier 2 rules, companies are able to sell to investors from multiple states. Once qualified, securities can be sold directly to the public, without limitations other than the above-referenced income requirement. This frees entrepreneurs to raise capital without limiting them to wealthy, accredited investors. It also allows them to sell to friends and family as well as to take advantage of social media, advertising, and specialized crowdfunding platforms that connect their offerings to potential investors. Regulation A has no restriction on marketing, giving entrepreneurs a valuable option for raising funds while maintaining control of their company.