What is Regulation A?
Regulation A offers companies a faster and more efficient means for raising investment capital. To maximize the benefits of a Reg A offering, however, a company must ensure that the market will respond favorably to the securities it is selling.
Under Regulation A, issuers of securities are exempted from many of the traditional registration requirements for public offerings. Administered by the U.S. Securities and Exchange Commission, Reg A includes two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period.
To succeed, issuers need to devise a strategy to educate the market about their company and their prospective offering or to develop or solidify relationships with the broker-dealers (BDs) and registered investment advisors (RIAs) who will be selling their securities to investors or both.
An Evolving Offering Structure
In 2012, Congress amended securities laws to allow a greater number of companies to raise capital without the burden of cost-prohibitive registration requirements. The amendments dramatically enhanced exemptions under Regulation A. The legislative changes required the SEC to promulgate new regulations to implement Congressional intent. The new regulation, commonly referred to as Regulation A+, was finalized by the SEC in 2015 and has been updated multiple times since.
The new rules relaxed some of the prohibitions on “testing the waters” communications that allow an issuer to determine if there’s a market for its securities. Non-accredited investors can take part in offerings up to certain limits. And Tier II issuers are given protection from virtually all state-level securities registration requirements, having to provide only notice filings to the states.
While the number of Reg A offerings have been accelerating since 2015, issuers have encountered some difficulty breaking into the broker-dealer and registered investment advisor (RIA) distribution channels that are so critical to their success. Institutional participation in offerings was also limited during the first several years of Reg A+.
Recognizing these challenges, Congress and the SEC have attempted to improve Reg A. Initially, for instance, companies subject to the reporting requirements of the Exchange Act of 1934, as amended (i.e., publicly traded companies) weren’t allowed to use Reg A. In 2018, the SEC amended Reg A to allow reporting companies to take advantage of Reg A and to have satisfied its reporting requirements under Tier II of Reg A if they had already met their Exchange Act obligations.
Perhaps most significantly, in 2021 the SEC moved the Tier 2 cap from $50 million to $75 million per year to allow a far larger pool of companies to participate in Reg A offerings and to attract larger and more experienced investors to the fold.
Opening Regulation A to larger investors has the added potential of making the offerings more attractive to BDs and RIAs. Still, companies will need to invest in efforts to help educate the BDs, RIAs and prospective investors about the benefits of Regulation A offerings.
For a number of broker-dealers and RIAs, Reg A+ is still a relatively new and unfamiliar investment structure. Reg A+ has been described as a “mini-IPO” or “IPO-lite,” which may have given the impression to investment professionals that a Reg A+ offering is more complex than it actually is.
BDs and RIAs also have had questions about potential liability, and the structure appeared to many of them as part of a general trend toward general solicitation of investment funds, which they view as a potential threat to their businesses. As a result, some BDs and RIAs have been hesitant to take on Reg A+ offerings.
Adding to the challenge is the fact that many smaller and mid-sized companies do not have large sales organizations to reach broker-dealers and investors. They also may be operating in more traditional industries like real estate that don’t have the market buzz of a high-tech startup. Thus, a social media or advertising campaign may not be enough to generate interest in an offering.
Building Credibility and Market Interest
Building broker-dealer and investor enthusiasm require a sustained effort.
One important step successful KVCF clients have taken is engaging a driven, connected managing broker-dealer to work on its behalf. For issuers, the reduced costs and time to market versus a public registration are a critically important benefit of Regulation A. However, a sustained marketing effort involving building a team of wholesalers (FINRA registered personnel who market offerings to BDs, rather than directly to investors) or launching an extensive publicity campaign could eat up a substantial portion of both monetary and time-savings.
A managing-broker dealer, on the other hand, can leverage existing industry relationships and establish selling agreements with BDs and RIAs. They can improve efficiency by helping manage legal and compliance efforts and assist in educating broker-dealers and RIAs on the benefits of Reg A, thus helping to improve the credibility of an offering. Some managing BDs focus more on compliance and management while others include more of a wholesaling function. It is important for a Reg A issuer to identify, with its advisors, what type of MBD it needs in the selection process.
Robust early planning is critical to the success of a Reg A offering. Simply copycatting prior structures without taking the time to canvass industry contacts (where an MBD can often help) on the successes, and failures, of those offerings, may result in an issuer trying to sell yesterday’s bread today. Once a capital need is identified, successful Reg A issuers often solicit opinions from the BD/RIA community about their structure, business plan, and security to be offered. Industry feedback will help determine the structure of the company’s offering and may provide useful insights about any internal changes a company may need to make to improve its offering’s chances of success.
Further, transparency with the gatekeepers to capital can only enhance an issuers’ reputation and access.
Robust transparency sends a clear message that a company is serious about mitigating investor risk, which can improve market confidence
While Reg A+ certainly offers efficiencies versus a public registration, a successful offering will still require serious investments of management’s time and the company’s capital. But they can result in an offering that returns tens of millions of dollars to the company and can create a successful template for future offerings as well.
To learn more about how we assist companies through the Regulation A process, contact us for a consultation.