Regulation A (“Reg A”) is intended to help smaller issuers to attract investment from a much wider variety of investors without forcing them to bear the cost of a public registered offering.
Expansion of Reg A by the JOBS Act of 2012 and subsequent regulatory changes from the Securities and Exchange Commission make Reg A a far more powerful financial tool for many companies — opening the door for many issuers to create sophisticated, long-term strategies that might target various investor classes at different stages of growth.
Previously, Regulation A issuers would have encountered integration rules that determined whether multiple securities transactions should be considered part of a single public offering. “Integrating” transactions into a single offering increased registration costs for issuers. A safe harbor provision developed as part of Regulation A reform has been designed to quell that concern. Reforms also allow Registration A securities exemptions under Rule 12(g) of the Securities and Exchange Act of 1934. Changes here, too, have helped allow multiple offerings and fewer registration requirements for companies.
Consider some scenarios:
1) A fast-growing software company is looking to raise capital to fund its expansion plans. It would like to use a Regulation A offering to raise $10 million commencing in June. The hitch? The company already closed on $5 million through a successful Regulation A offering in January. Can the company keep raising money via Regulation A?
Yes. Tier I and Tier II permit the issuer to raise $20 million or $50 million in a trailing twelve-month period in one or more multiple offerings.
2) Issuer has raised $50 million in private offering under Regulation D two months ago and would now like to raise $50 million in a Regulation A offering. Can they do it?
Yes. The caps only apply to funds raised through the sale of securities exempt under Reg A. SEC would not look at the Regulation D offering with regard to the caps, also any securities sold prior to an initial Reg A offering will not be factored in any integration analysis.
3) A company raised $50 million in a Reg A in first quarter of 2019 and now wants to form capital privately with an institutional investor in 4th quarter 2019. Can they?
Yes. While integration rules related to Reg A and other types of exempt securities have been relaxed, there is a clear safe harbor for transactions beyond six months in time.
4) Issuer wants to embark on a multi-year program of raising $50MM every 12 months. Should they be concerned that they will have too many investors, thus triggering requirements to register under the Securities Exchange Act of 1934?
No. A specific exemption from Rule 12(g) applies to issuers of Tier II securities.
5) A real estate investment group would like to conduct multiple Reg A offerings at roughly the same time for separate affiliated entities which hold different assets from each other can they?
Yes. Most Reg A requirements, such as the maximum that can be raised, relate to the issuer. Different entities, with different assets and, thus, different investments, can be run by the same sponsor contemporaneously.
There are plenty more scenarios for which Reg A can provide a flexible solution. The law around Reg A has been developing quickly during the last several years. The experts at KVCF can help you understand these changes and help you develop a capital strategy to quickly capitalize on Regulation A’s potential. Contact us for a consultation to learn more.