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Changes in SEC Regulation A and Regulation D

By: William R. James
March 26, 2021
SECURE Act Discussion with Client

On March 15, 2021 certain important SEC rule changes went into effect.

SEC Regulation A

What is new?

The regulation now provides two offering tiers for both U.S. and Canadian issuers.

Tier 1 securities offerings up to $20 million in a 12-month period, including no more than $6 million sold on behalf of selling shareholders. Subject to a coordinated review by states and the SEC. The issuer must file Form 1-A (greatly simplified from the complex Form S-1) along with two years of financial statements. There is no need for these statements to be audited.

Therefore, on this tier, state “blue sky” laws of every state in which the issuer expects to raise money are applicable. When the offering is complete it must also file an exit report on Form 1-Z not later than 30 days after completing the offering, explaining how much was raised and how the money was allocated. Note that this harmonizes with Regulation D, which also requires a final report (using Form D) within 30 days of concluding the offering. Lastly, there are no restrictions to resale and no investor requirements, such as being an accredited investor.

Tier 2, as of March 15, 2021, securities offerings up to $75 million in a 12- month period, including no more than $22.5 million of securities sold on behalf of selling affiliate shareholders, such as officers and directors. This is an increase from the previous limits of $50 million and $15 million respectively.

Tier 2 permits a kind of mini-IPO allowing small, emerging companies to forego venture capital and raise substantial capital that is subject only to SEC scrutiny, preempting the burden of state regulation. New and innovative companies can look to nonaccredited investors such as their customers, employees, or even the general public for substantive financing with only a fraction of the regulatory burdens formerly seen. As we read in Tier 1, a Form 1-A must be filed along with two years of audited financial statements, and an exit report. A Tier 2 exit report can be satisfied by filing Form 1-Z or alternatively 1-K, which is specifically designed with the view to satisfy both purposes. With this tier the issuer must also file annual (Form 1-K), semi-annual (Form 1-SA), and “current report” (Form 1-U) similar to Form 8-K in public companies.

Companies that are already publicly reporting, such as companies that are listed on an exchange, will be considered compliant concerning their Regulation A ongoing disclosure obligations by remaining current in their public reporting obligations. Non-accredited investors are subject to limits on how much they can buy based on their annual income and net worth unless the offering is to be listed on a national stock exchange, then there is no restriction. Non-accredited investors are subject to investment limits based on the greater of annual income and net worth.

Both tiers exclude blank check companies (SPACS), registered investment companies such as mutual funds and asset-backed securities. “Bad actor” disqualifications also apply. A bad actor includes, in part, the issuer, directors, partners or executive officers who have:

  • Criminal convictions relating to securities transactions
  • Made false filing with the SEC
  • Been suspended or expelled from SROs such as FINRA

These Regulation A offering statements and disclosures must be filed on EDGAR in the same fashion as we previous read about S-1 registrations for IPOs. Tier 2 issuers are required to concurrently file a short-form Form 8-A to register a class of securities under Exchange Act. This is very desirable because it allows a Tier 2 issuer, if it chooses to do so, to list on a national securities exchange. “

Testing the waters” on a new offering under Regulation A is permitted by the issuer to determine investor interest. This is done by distributing statements about the offering right up to the time the SEC qualifies its Form 1-A offering circular. During the pre qualification period, issuers must deliver a preliminary offering circular to prospective buyers at least 48 hours in advance of the sale unless the issuer is subject to, and current in, Tier 2 ongoing reporting obligations.

Regulation D Offerings

What is new?

As of March 15, 2021, a Rule 504, Regulation D offering, which is distinct from most of the Regulation D rules, involves the offering of securities in which the dollar amount does not exceed $10 million. It is distinct from 506 in that:

  • There are no limitations on the number of purchasers, accredited or non.
  • There is no requirement that purchasers meet suitability or sophistication standards, though bad actors, as mentioned above, are prohibited from participating.

Rule 504 offerings are not available for blank check companies (entities without a defined business or business plan).

Regulation DSize Accredited Investors Non Accredited InvestorsGeneral Solicitation*
Rule 504 $10 millionUnlimited Unlimited No 
Rule 506(b)Unlimited Unlimited 35 No 
Rule 506(c)*Unlimited Unlimited 0Yes 

 

*The JOBS Act required the Commission to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited, and the issuer takes reasonable steps to verify that the purchasers are in fact accredited.

SEC Regulation Crowdfunding

Issuers may rely upon section 4(a)(6) of the Securities Act of 1933 (Regulation Crowdfunding), which enables companies to offer and sell securities exempt from the registration requirements of the act.

The rules require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary. That may be either a broker-dealer or a funding portal that permits a company to raise a new (2021) maximum aggregate amount of $5 million. The offering requires disclosure of information by filings with the Commission on Form C, including two years of financial statements that are certified, reviewed, or audited, as required. Besides, progress and annual reports. These must also be sent to investors and the intermediary facilitating the offering.

There are now investment limits for accredited investors. For non-accredited investors, they may purchase an amount equal to the annual income, or alternatively, net worth, whichever is greater. Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Regulation Crowdfunding offerings are also subject to "bad actor" disqualification provisions the same as Regulation A and D.

Sample Questions

1) Regulation A, requires an underwriting broker-dealer furnish an offering circular to purchasers?

A. 48 hours in advance of sales
B. 24 hours before the confirmation
C. 72 hours before the confirmation
D. Concurrently with the mailing of the customer confirmation

Regulation A requires that an offering circular be provided to purchasers at least 48 hours in advance of sales, so the answer is A.

2) The maximum public offering permissible under Regulation A is:

A. $500,000 per issuer and $500,000 per affiliate
B. $2 million per issuer and $100,000 per affiliate
C. $2 million per issuer and $500,000 per affiliate
D. $75 million

The maximum size of an offering under Regulation A (sometimes known as A+) is $75 million per issuer, so the answer is D. Sales are measured over a 12-month period.

3) Under Regulation D, Rule 504 offerings provide a safe harbor for the sales of securities:

A. Without regard to dollar amount
B. Not exceeding $10 million
C. Not exceeding $50 million
D. Not exceeding $20 million

Regulation D offerings are exempt transactions under the Act of 1933. Rule 504 provides a safe harbor from full registration for private placements in which the dollar amount to be sold is $10 million or less, so the answer is B. By comparison, Rule 506(b) and (c) has no ceiling on the dollar amount offered.

4) Regulation Crowdfunding permits offering limits to:

A. $500,000
B. $1 million
C. $5 million
D. $20 million

Offering limits are currently set by federal regulators to $5 million, so the answer is C. They also amended the individual investment limits for investors in Regulation Crowdfunding offerings by removing investment limits for accredited investors.