Regulation A+ and the “Mini-IPO”: Tips for Startups
Regulation A+, sometimes called Reg A+, is frequently referred to as the “mini-IPO.” It is a scaled down version of a traditional IPO that subjects certain early-stage companies to less stringent requirements. The mini-IPO process is less costly, has less onerous ongoing reporting requirements, and involves a shorter timeline to going public.
Regulation A+ offerings enable startups and other smaller-sized companies another means to access funding. The ability to offer publicly traded shares can also increase customer engagement for young startups. The shares in a Regulation A+ offering are available for purchase by institutional and retail investors alike. But marketing efforts tend to skew toward retail investors. This aspect of Regulation A+ offerings draws parallels to crowdfunding. It contrasts with traditional IPOs, whereby large institutional investors make up the bulk of the securities purchases.
Regulation A+ and the JOBS Act
President Obama signed The JOBS Act into law on April 5, 2012. The Act implemented a number of regulatory changes designed to make public markets more accessible to emerging growth companies (EGCs). The Securities and Exchange Commission (SEC) defines an EGC as a company with less than $1.07 billion in total gross revenues during its most recent fiscal year.
Prior to the passage of the JOBS Act, only Regulation A existed. The former Regulation A provided exemptions from certain regulatory requirements for securities offerings of less than $5 million. Few companies used the exemption in practice. Despite getting relief from certain federal regulatory hurdles, companies attempting to use Regulation A often faced challenges with state laws. Additionally, companies perceived $5 million as too insignificant of an amount to bother taking advantage of Regulation A.
The JOBS Act overhauled Regulation A, replacing it with Regulation A+. Regulation A+ greatly modernized and improved the process of going public for small, early-stage companies.
Regulation A+ is part of Title IV of the JOBS Act. In a rule the SEC adopted in 2015, Section 401 of Title IV now makes it easier for private growth-stage companies to raise money on public markets. Regulation A+ refers to the amendments made to Reg A by the SEC rule adopted in 2015. It expands Regulation A into two tiers, Tier 1 and Tier 2.
Two Offering Tiers
Under Tier 1, a company may raise up to $20 million on public markets in a 12-month period while being subject to minimal reporting requirements. Additional state law requirements may apply to Tier 1 offerings though. Tier 2 enables a company to raise up to $50 million in a 12-month period. Tier 2 offerings are exempt from additional obligations under state law.
Companies that want to pursue an offering of $20 million or less can elect to pursue either a Tier 1 or Tier 2 offering. The Regulation A+ exemptions apply both to U.S. and Canadian companies offering securities.
The Mini-IPO Process
The mini-IPO process under Regulation A+ resembles the traditional IPO process in many ways. Companies that want to issue securities must file a registration statement on Form 1-A. The registration statement for a regular IPO is a Form S-1. After the company submits the registration statement for the offering to the SEC, the SEC will review and provide comments. The offering can commence only once the review process results in the “qualification” of the Form 1-A. A notice of qualification will be posted by the SEC’s Division of Corporation Finance. Unlike a traditional IPO, there are no filing fees associated with submitting a Form 1-A for review to the SEC.
At the same time the SEC review occurs, the Financial Industry Regulatory Authority (FINRA) reviews offerings under Regulation A+. The FINRA review particularly focuses on making sure the underwriting arrangements are fair.
Under Rule 255 of Regulation A+, companies may discuss an upcoming Regulation A+ offering with potential investors in order to solicit interest. This is known as “testing the waters” communications. A number of anti-fraud provisions under the securities laws apply to such communications.
Within two business days of a Regulation A+ offering of securities, the company must deliver a preliminary offering circular to investors. This delivery requirement can be achieved by simply posting a notice accessible to the investors under the “access equals delivery” rule.
Regulation A+ Ongoing Report Requirements
After qualifying under Regulation A+ as either a Tier 1 or Tier 2 issuer, companies still face ongoing SEC reporting requirements.
Tier 2 issuers must file periodic reports with the SEC. These periodic reports have many similarities to the reports filed by regular-sized companies. An annual report called a Form 1-K, which highlights the company’s business operations, ownership structure, audited financial statements, and executive officer information, must be completed by Tier 2 companies. This is analogous to the annual reports on Form 10-K that most types of companies submit every year.
Additionally, Tier 2 issuers must file semiannual reports on Form 1-SA. This is similar to the quarterly reports on Form 10-Q for regular companies. Finally, if an event occurs that materially impacts the business, the company must submit a current report on Form 1-U within four days of the triggering event. This is analogous to the Form 8-K required of normal-sized companies in response to a material change in the company.