What Is Regulation A? Definition, Update, Documenation, and Tiers

Definition

Regulation A is a U.S. Securities and Exchange Commission (SEC) regulation that allows companies to offer and sell securities to the public without going through the usual registration process. It was updated by the JOBS Act in 2012, allowing two tiers; Tier 1 allows offerings up to $20 million in a 12-month period, while Tier 2 allows offerings up to $75 million. The documentation involves filing a detailed offering circular which includes information about the company’s operations, management, and financials.

Key Takeaways

Definition: Regulation A is a Securities and Exchange Commission (SEC) regulation that allows public offering of securities that otherwise do not require SEC registration. It’s also known as a mini-IPO and helps small- to mid-size companies access capital.

Update: Regulation A was updated through the JOBS Act in 2012 and subsequent amendments in 2015. Among other things, these updates increased the fundraising limit from $5 million to $50 million in a 12-month period.

Documentation and Tiers: Companies using Regulation A are required to provide certain documentation, including financial statements, and they must comply with ongoing reporting requirements. The regulation is divided into two tiers:

• Tier 1, for offerings up to $20 million in a 12-month period.
• Tier 2, for offerings up to $50 million in a 12-month period. Tier 2 requires audited financial statements and annual reports, among other documents.

Importance

Regulation A is a significant provision under the U.S. securities law, which allows smaller companies to raise capital through the sale of equity or debt securities to the public without having to register the securities with the U.S. Securities and Exchange Commission (SEC). The importance of this regulation is emphasized in its purpose to simplify the process and reduce the regulatory burden for small businesses, thus stimulating business growth and aiding the progress of the private sector.

The recent updates to Regulation A, often referred to as Regulation A+, expanded this exemption to allow companies to raise more capital, making it an even more critical tool for growth.

The documentation required under Regulation A offers transparency, providing potential investors with necessary information. Lastly, the two tiers of Regulation A, which allow different capital raising thresholds, give businesses more flexibility, further highlighting the importance of this regulation in the business/finance sector.

Explanation

Regulation A serves a fundamental role in the field of finance and business, acting as a distinct exemption made by the Securities and Exchange Commission (SEC). It enables smaller companies to offer and sell securities to the public without registering with the SEC, thus reducing regulatory burden while facilitating capital formation.

Predominantly, this regulation provides a more accessible and cost-efficient pathway for smaller and emerging companies to raise capital, catering to companies seeking less than $50 million in investment.

The regulation is structured into two distinctive tiers, Tier 1 and Tier 2.

• The Tier 1 offering pertains to securities up to $20 million in a 12-month period, of which no more than $6 million can come from entities affiliated with the issuer.
• Meanwhile, Tier 2 applies to offerings up to $50 million in a 12-month period, where no more than $15 million can be from entities affiliated with the issuer. Both tiers come with specific conditions and obligations; however, companies undergoing Tier 2 offerings must also provide audited financial statements and file ongoing reports, ensuring a comprehensive disclosure regime and robust investor protection.

Examples

Regulation A refers to an exemption from registration requirements instituted by the Securities and Exchange Commission (SEC), which applies to public offerings of securities that do not exceed $50 million in any one-year period. Companies utilizing Regulation A are required to provide an offering statement and are also subject to certain ongoing reporting requirements. Regulation A has two offering tiers: Tier 1, for securities offerings of up to $20 million in a 12-month period, and Tier 2, for securities offerings of up to $50 million in a 12-month period.

Real World Examples:

1. Elio Motors: In 2015, Elio Motors, a startup auto-manufacturer in the USA, raised nearly $17 million through a Regulation A+ mini-IPO. They allowed small investors to invest in their company, even before they produced their first vehicle. This crowdfunding approach brought in over 6,500 investors, demonstrating the power of Regulation A+ to raise significant capital from everyday investors.
2. Med-X, Inc: Med-X, Inc. is a Nevada organized company associated with the cannabis industry that took advantage of Regulation A for their financial needs. In 2016, they raised funds through a Tier 2 Regulation A offering. This makes it one of the first instances to use Regulation A to raise capital in the cannabis industry and exemplifies how smaller, niche businesses can leverage this rule.
3. Hightimes Holding Corp: High Times used a Tier 2 Regulation A+ offering to transition to a publicly owned entity in 2018. Instead of pursuing typical channels through venture cap or private equity, High Times sought a greater number of small investors who are passionate about the cannabis culture and industry, raising around $15 million in the process.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Exemption from Registration
• Offering Circular
• Tier 1 and Tier 2
• Securities Act
• Blue Sky Laws

Sources for More Information

• U.S. Securities and Exchange Commission (SEC)
• Investopedia
• Corporate Finance Institute
• Financial Industry Regulatory Authority (FINRA)