Reg A
Table of Contents
Introduction & History
Regulation A (Reg A) is a securities offering exemption that allows companies to raise up to $75 million in capital from both accredited and non-accredited investors.
It was created by the Securities and Exchange Commission (SEC) in 2015 as part of the Jumpstart Our Business Startups (JOBS) Act. Reg A is designed to provide companies with a more streamlined and cost-effective way to raise capital than traditional IPOs, while still allowing investors to participate in these offerings.
Reg A has two tiers: Tier 1 and Tier 2.
- Tier 1 allows companies to raise up to $20 million in capital in a 12-month period
- Tier 2 allows companies to raise up to $75 million in a 12-month period. Tier 2 offerings are subject to additional disclosure and reporting requirements, but also provide greater benefits to issuers and investors, such as the ability to sell to non-accredited investors and the ability to list on national securities exchanges.
Reg A is important for companies seeking to raise capital because it provides them with an alternative to traditional IPOs or private placements. For investors, Reg A allows them to participate in offerings from companies that they may not have had access to before.
Benefits and Risks
Reg A offers several benefits for companies seeking to raise capital. One of the main advantages is that it allows companies to raise money from both accredited and non-accredited investors. This is different from other securities exemptions, such as Reg D, which only allows companies to sell to accredited investors.
Reg A also allows companies to engage in general solicitation and advertising to promote their offerings, which can help them reach a broader audience and increase their chances of success. Additionally, companies that complete a Reg A offering can list their securities on national securities exchanges, providing them with greater visibility and liquidity.
However, there are also risks and limitations for investors. Reg A offerings are still considered high-risk investments, and there is no guarantee that investors will receive a return on their investment. Additionally, the disclosure and reporting requirements for Reg A offerings may not provide investors with as much information as they would receive from a traditional IPO.
Comparing Reg A to other securities exemptions, Reg D is limited to accredited investors and has no limit on the amount of capital that can be raised. On the other hand, Reg CF allows companies to raise up to $5 million in capital from both accredited and non-accredited investors, but has more restrictions on advertising and general solicitation.
Process and Timeline
The process for completing a Reg A offering involves several steps. First, the company must file an offering statement with the SEC, which includes detailed information about the company and the offering. This includes financial statements, business plans, and details about the company’s management team.
Once the offering statement is approved by the SEC, the company can begin marketing the offering and soliciting investors. The company must provide investors with an offering circular, which includes additional information about the offering, the risks involved, and the company’s financials.
After the offering has closed, the company must file ongoing reports with the SEC, including annual and semi-annual reports, and special reports if there are material changes to the offering or the company’s financials.
The timeline for completing a Reg A offering can vary depending on several factors, including the size of the offering and the complexity of the company’s financials. Generally, the process can take several months to complete.
Comparing the Reg A timeline to other securities offerings, Reg A is generally faster and less expensive than a traditional IPO, but can take longer than a Reg CF offering.
Disclosure Requirements (Continued)
In a Reg A offering, issuers must provide detailed information about their business and financials to potential investors. This information includes audited financial statements, information about the company’s management team, a description of the company’s business operations, and details about the risks associated with the investment.
In comparison to other securities offerings, Reg A disclosure requirements are generally more extensive than Reg CF but less extensive than traditional IPOs. For example, a traditional IPO requires a prospectus that provides in-depth information about the company’s business, financials, and risk factors. Reg A offerings require similar information, but not to the same extent as a traditional IPO.
Secondary Market Trading and Liquidity
Reg A securities can be traded on secondary markets, which provides investors with liquidity and the ability to sell their shares. However, liquidity can be limited, particularly for Tier 1 offerings, as the market for these securities may be smaller and less active than Tier 2 offerings.
In comparison to other securities offerings, Reg A secondary market trading is generally less active than for publicly traded companies. Traditional IPOs and publicly traded companies have more liquidity because their shares are traded on national securities exchanges, which provide a more liquid market.
Case Studies
Several companies have used Reg A to successfully raise capital. One example is KBS Growth & Income Real Estate Investment Trust, which raised $1.7 billion in a Tier 2 offering in 2018. The company used the proceeds to acquire several properties, including office buildings, apartments, and hotels.
Another example is FAT Brands, which raised $24 million in a Tier 2 offering in 2017. The company used the proceeds to acquire several restaurant chains, including Johnny Rockets and Hurricane Grill & Wings.
Both companies cited the ability to raise capital from a broad range of investors as one of the main advantages of using Reg A.
Conclusion
In conclusion, Reg A is a securities offering exemption that provides companies with an alternative to traditional IPOs or private placements. Reg A allows companies to raise up to $75 million from both accredited and non-accredited investors and can be a more cost-effective and streamlined way to raise capital.
For investors, Reg A provides an opportunity to invest in companies that they may not have had access to before. However, there are risks involved, and investors should carefully consider the information provided in the offering circular before investing.
Reg A is not the only securities exemption available, and companies should carefully consider their options before deciding which exemption to use. Reg A is most appropriate for companies that want to raise more than $5 million and want to offer their securities to both accredited and non-accredited investors.
Overall, Reg A is an important tool for companies seeking capital and for investors looking to participate in these offerings. As the securities industry continues to evolve, it will be interesting to see how Reg A and other securities exemptions continue to impact the way companies raise capital and investors participate in these offerings.
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet.
