Regulation A, sometimes referred to as a mini-IPO, is an exemption from the standard registration requirements for companies that offer securities totaling less than $50 million per year. Under Regulation A, these companies are subject to lower fees and fewer disclosure requirements than a traditional IPO, allowing them to gain investors without the usual barriers to entry.
Requirement Tier 1 and Tier 2
Regulation A filers are separated into two tiers with different filing requirements:
|Requirement||Tier 1||Tier 2|
|Maximum securities per year||$20 million||$50 million|
|Investor Limitations||None||Non-accredited investor may invest up to 10% of annual income or net worth|
|Registration with state required||Yes||No|
|Bad actor disqualification||Yes||Yes|
Each tier has different disclosure requirements and eligibility qualifications. Tier 1 is for offerings that are less than $20 million, whereas a Tier 2 filer can offer securities up to $50 million. A bill was introduced to the House of Representatives in 2017 (H.R.4263), which proposed increasing the offering cap to $75 million for Tier 2 filers. This bill passed the House but has remained in the Senate Committee on Banking, Housing, and Urban Affairs since March of 2018.
Registration A filer eligibility requirements include :
- Principal place of business listed as within the United States or Canada
- Must not be registered under the Investment Company Act of 1940
- Have a specific business plan that is not to solely engage in mergers and acquisitions
- Not subject to a “bad actor” disqualification, such as when a director or executive has a “disqualifying event” such as a criminal conviction.
Difference Between Requirement Tier 1 and 2
Some other differences between Tier 1 and 2 are the regulations to which each is subject. When filing as a Tier 1 Regulation A filer, you are required to register and comply with state securities regulations, however, if you file as a Tier 2, you are not required to register with the state. While this may seem enticing to some, registering as a Tier 2 security comes with limitations for who can invest. Only those who qualify as an “accredited investor” may avoid the limitations. All other investors are limited to investments of 10% of their annual income or net worth.
If a company is interested in registering as a Regulation A filer, but is unsure whether their offering will draw enough interest for them to go through with the filing, they can do a “testing the waters” offering. This 2019 ruling allows those interested in filing to see what kind of market interest there is for the offering before spending thousands on filing all of the offering statement paperwork. This can be done through advertising to potential investors to gauge interest, but not actually receiving any money for the offering. The pre-filing testing the waters documents must be filed if an offering is later made.
Are you interested in filing under Regulation A? Still confused about what you need to do? Contact our in-house experts for help filing the required forms or to learn more about the requirements.