RIA Compliance Blog
On June 19, 2015, new amendments to Regulation A took effect which should increase capital raising options of some smaller businesses. Formerly, the Regulation A exemption was limited to $5 million. The new amendments provide an avenue for businesses to raise up to $50 million of capital. As a result of the new amendments, Regulation A is now divided into two tiers, “Tier 1” and “Tier 2.”
In Tier 1 offerings, companies can raise up to $20 million over a one year period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer. Under Tier 1, the offering must pass state securities regulation in any state where investors are located.
In Tier 2 offerings, companies can raise up to $50 million over a one year period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. A Tier 2 offering has the significant advantage of being exempt from many state registration requirements.
Under the Exchange Act Section 12(g), an issuer is required to file an Exchange Act registration statement regarding a class of equity securities within 120 days of the last day of its fiscal year if, on that date, certain thresholds are met. In order to take be exempted from Section 12(g), a Tier 2 offering issuer must:
- Engage services from a transfer agent registered with the commission;
- Remain subject to a Tier 2 reporting obligation;
- Be current in annual and semiannual reporting at fiscal year-end; and
- Have a public float of less than $75 million as of the last business day of their most recently completely semiannual period, or, in the absence of a public float, have annual revenues or less than $50 million as of their most recently completed fiscal year.
Tier 2 offerings are also subject to a few additional regulatory requirements. The issuer must provide audited financial statements and file annual and current event reports. For non-accredited investors, there’s an investment limit of no more than 10 percent of the greater of the investor’s annual income or net worth.
Who is eligible to use this Regulation?
To be eligible to take advantage of this regulation, a company must be organized in and have their principle place of business located in either the United States or Canada.
This exemption is not available to companies that:
- Are already SEC reporting companies;
- Are companies with no specific business plan or purpose or that have indicated their business plan is to engage in a merger or acquisition with an unidentified company with certain characteristics;
- Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights;
- Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years;
- Have not filed ongoing reports required by the rules during the preceding two years; or
- Are disqualified under the “bad actor” disqualification rules.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.