What is Regulation A?
At a high level, Reg A is a regulation adopted by the Securities and Exchange Commission (“SEC”) that allows private companies to raise capital from the public. The recently updated regulation, which is an exemption from registration under the Securities Act of 1933, helps democratize the investment landscape by opening the door for the general public to invest in private companies. Reg A gives individual investors a chance to invest in opportunities historically open only to institutional and angel investors.Due to its structure, many types of companies can use Reg A to raise money. Reg A offerings are a popular choice for technology companies seeking to fund business growth or product development, for consumer goods companies looking to expand their product line, and for real estate developers funding property acquisition. Reg A offerings are typically launched by companies that focus on select industries or have niche fundraising structures. For example, in the real estate context, many companies elect to use Reg A offerings to fund their real estate investment trust (“REIT”). In a REIT, pooled investor funds are often used to invest in a portfolio of real estate assets. Reg A provides a streamlined way for the REIT to raise money from the public and efficiently acquire the real estate assets.Types of Reg A offerings
As set out by the SEC, Reg A offerings can be completed under one of two tiers. The two tiers have different reporting requirements and authorize companies to raise different amounts of money. The regulation provides more flexibility for companies seeking to raise while ensuring investors receive adequate information from the company raising.Tier 1
Companies can use a Tier 1 Reg A offering to raise up to $20 million over 12 months. The company must file a Form 1-A offering statement with the SEC, including the company’s financial statements. In most cases, Tier 1 offerings do not require audited financial statements, but the SEC has outlined cases where audited financials may be required. Though Reg A is a federal regulation, companies using Tier 1 usually need to file state-by-state registrations in each state where they intend to sell securities. The offering will likely be subject to review by those states under state-specific Blue Sky laws. After the offering, companies must file an exit report 30 days after the offering closes, but are not required to submit annual or semi-annual updates to investors. Overall, given the $20 million raise limit, the Tier 1 requirements are lighter than those for Tier 2.Tier 2
Tier 2 Reg A offerings permit companies to raise up to $75 million over a 12-month period, which is substantially higher than the Tier 1 limit of $20 million. Like Tier 1, companies must file an offering statement with the SEC and undergo a thorough SEC review. The SEC must qualify the offering before the company starts selling securities. That process and its related requirements can often take companies four to six months to complete, which may partly relate to the requirement of including audited financial statements. Companies offering under Tier 2 need to work with an auditor who is willing to consent to their audit being included in the offering and publicly filed.Unlike Tier 1, Tier 2 does typically preempt state law, although companies should work with counsel to determine any state compliance that may be required. Additionally, Tier 2 requires more rigorous ongoing reporting, including annual, semi-annual, and current event reports. These reports are designed to provide investors with more comprehensive financial and business information to keep them updated on their investment status. It is also worth noting that in a Tier 2 offering, non-accredited investors may only invest up to 10% of their annual income or net worth. Tier 1 does not include that limitation.Overall, Tier 1 and Tier 2 offer different raise amount authorizations and come with different reporting requirements. Investors must understand which tier they are investing in and what ongoing reports they should expect to receive. The chart below outlines the high-level differences between Tier 1 and Tier 2.| Requirements | Tier 1 | Tier 2 |
| Maximum raise over 12 months | $20 million | $75 million |
| File an offering statement with the SEC | Yes | Yes |
| Audited Financials | Not typically required | Required |
| State Regulations | Blue Sky regulations: State-by-state registration, fees, and review of documents | Blue Sky exemption: Can typically raise in all states, though some state compliance may be required |
| Ongoing Reporting | No ongoing reporting required. Exit report 30 days after close of offering | Ongoing reporting required including annual, semi-annual, and current events reports |
How Reg A offerings work
For a company to participate in a Reg A, it must first determine its eligibility and determine whether it will offer under Tier 1 or Tier 2. Certain eligibility requirements must be met before a company can offer securities via Reg A. For example, in a Tier 2 raise, the company must be formed and have its principal place of business in the United States or Canada. It must not be an investment company required to register under the Investment Company Act of 1940, not be a business development company, and not be disqualified under “bad actor rules” as outlined by the SEC.After determining eligibility, the company will prepare the required financial statements, draft an offering circular, and file the offering circular and all required documents with the SEC. The main document the company drafts is a Form 1-A, which includes the offering circular and exhibits. The offering circular outlines the details of the offering, the business, required disclosures, and any necessary financials. The two main authorizations the company needs to receive before selling securities to the public are “qualification” by the SEC and receiving a no objection letter from the Financial Industry Regulatory Authority (“FINRA”). Once the offering is qualified by the SEC and a no objection letter is received from FINRA, the company can start to sell securities and individuals can start investing via the company’s offering page. To ensure regulatory compliance, the Reg A investment process must be facilitated by a broker-dealer that assists the company in offering the securities.Benefits of Reg A offerings for investors
There are multiple benefits for investors who participate in a company’s Reg A offering. First, investors have the opportunity to invest in typically early-stage companies with significant growth potential and financially back companies they support and want to see grow. Over the life of the investment, investors will likely receive insider updates on the company, particularly if the Reg A is offered through Tier 2. Second, Reg A offerings may be a way for investors to diversify their investment portfolio beyond traditional investments like public stocks and bonds. Finally, if the company reaches a successful exit or IPO, investors may see their investment grow in value.Drawbacks of Reg A offerings for investors
Like any investment, there is no guarantee of returns for investors choosing to invest in a Reg A offering. Many early-stage companies opt to use Reg A to fundraise, and that investment may be more risky than an investment in a larger, more established company. Compared to a traditional public company investment, Reg A requires fewer disclosures to investors, particularly if the company offers under Tier 1. This means that investors may receive less information about the company throughout the life of their investment. Some companies, however, provide regular updates to investors including investor calls, webinars, and conferences. Additionally, investors should always refer to the offering circular drafted by the company to do their own up-front research about the company. Lastly, shares purchased in Reg A offerings may not be liquid, meaning that investors may need to wait for a company to exit or IPO for them to be able to sell their stake.How to invest in a Reg A offering
Before investing, it is important to consult with a financial advisor or investment professional who can provide personalized advice based on your financial goals and risk tolerance. Once you decide to move forward, you follow these general steps to invest in a Reg A offering:- Research: The company conducting a Reg A is required to provide an offering circular, which includes information about the company, its business model, and how the funds will be used. The offering circular is a great place to start investment research. You may also conduct your own independent research on the company, seeking out news articles, press releases, and industry reports. Many companies will also offer the opportunity to engage with their team via webinars or investor calls, allowing you to take advantage of direct access to the company’s executive team.
- Assess the risks and rewards: Early-stage companies can be risky because they have a limited operating history. However, the growth potential can be attractive to investors with a higher risk tolerance, as you may get in on the ground floor of a company’s future growth.
- Understand investor rights: Review the terms of the investment, which should include the type of securities offered and any rights or privileges that come with those securities such as dividends or voting rights. It is key to understand the investment exit strategy, including the mechanisms for you to sell your investment and any guidelines about such sales if they are permitted.
- Complete the investment: Follow the platform or broker’s instructions for investing. This includes choosing the investment amount, signing an investment agreement, and adding personal information. Some platforms may have minimum investment requirements, or may even offer perks and bonuses for higher investment amounts.
- Safeguard investment documentation: You will receive confirmation of your investment and often will gain access to an investor portal to provide and receive updates, if applicable. Be sure to keep all investment files and login information in a secure location.
- Monitor the investment: Keep an eye out for company updates, especially if the company offered its raise via Tier 2. Through these updates and other personal research, you can keep abreast of the company’s progress, overall financial performance, and any developments that might affect your investment.
