Reg A and Reg A+ Offerings
Federal securities laws regulate the trading of securities in the United States. These laws require the offering and sale of securities to be registered with the Security Exchange Commission. However, there are certain exemptions that allow companies to sell their securities without getting registered with the SEC. Regulation A and A+ is an exemption from massive hustles of registration processes to gain access to finance for business. These regulations aim to create ease of doing business in the United States and open new horizons for companies with immense potential for development but lower financing resources.
Background of Reg A and A+
Financing is one of the biggest problems, especially for startups and small businesses. Small companies usually cannot afford to meet the cost of registration and other regulatory compliance. So, to solve this problem of budding companies, an Obama administration signed a landmark piece of legislation called The JOBS Act – Jump Start our business Act on April 05, 2012. This act opened new horizons of capital access for startups and businesses. The act allowed businesses to access crowds for raising finance and advertise their fundraising scheme in public. This act was considered a remarkable milestone in assisting startups in raising funds as a base of potential investors was changed from 2% wealthiest Americans to all in America.
To be an accredited investor, a person's annual income should exceed $200,000 and $300,000 for joint income of spouse for the last two years, and there must be an expectation that the individual's earning will be the same or higher in the current year. Further, an individual also qualifies as an accredited investor if their net worth exceeds $ 1,000,000, excluding property of primary residence. In August 2020, SEC updated the definition of accredited investors and added holders of professional licenses, limited liability companies, and family offices in the definition. However, these professionals and companies must have at least $5 million of assets or assets under management. It's important to note that condition for the accredited investors is limited to the tier-2 and under tier-1, finance can be raised from anyone.
Companies relying on Reg A must still file offering statements with SEC to provide issuing documents to the security buyer, same as a prospectus in case of a registered offering. Although these requirements need to be fulfilled by the companies, they are still straightforward and contain a low bar of procedural compliance compared with the registered process of offering securities. Reg A contains two different tiers that have different qualifying requirements and different limits for raising finance.
Under tier 1, financing amounting to $20 million can be raised in any 12 months period. However, no more than $6 million can be raised from affiliates of the security holders. Further, there is a requirement to get a qualification on offering statement from SEC staff and security regulator of the state in which the company plans to sell the securities. However, the companies raising finance under tier 1 do not need to continuously report on the status of the offering statement but on a final report at the end of the offering period.
Under tier 2, financing amounting to $75 million can be raised in any 12 months period. However, no more than $15 million can be raised from affiliates of the security. In tier 2, there is no need to get a qualification of the state regulator, but there is a need to continuously report on the status of the offering statement (annual report, semi-annual report, and current report, etc.). Further, there is a limitation on obtaining financing from the non-accredited investor. So, an investor must be accredited.