Home » News & Insights » How the Structure of a Reg A Offering Can Be Critical to Its Success

How the Structure of a Reg A Offering Can Be Critical to Its Success

by | Mar 8, 2022 | Regulation A

Structure of Regulation A Offering

Under Regulation A (Reg A), an issuer has the flexibility to adjust the structure of its securities offering to generate greater potential interest from prospective investors, independent broker-dealers, and registered investment advisors (RIAs).

For example, a well-structured offering can help overcome concerns that potential investors may have regarding the liquidity of a Reg A investment by guaranteeing an exit date for the investment. For investors and issuers concerned about costs, an offering may be designed to reduce the impact of the fees and commissions payable to distribution professionals associated with raising capital, often called the deal “load.”

This flexibility is one of the advantages of the Reg A offering process. Reg A provides an alternative to the traditional SEC registration process for public offerings. It has 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. (For offerings of up to $20 million, issuers may elect to proceed under the requirements of either Tier 1 or Tier 2.)

Addressing Liquidity and Timing

Reg A provides an exemption from traditional SEC registration requirements and reduces the red tape and expenses that have long been a barrier to many companies in raising capital in public markets. However, the market for Reg A offerings is still developing. Reg A has been operative in its current form since just 2015, and the SEC increased the upper limits for Tier 2 offerings only recently to attract more deals and investor interest. As a result, investors and their advisors may question their ability to remain liquid with an investment in a less-active market. While investors may have faith in a company’s business model and potential returns, they may still want a guarantee that they can exit the investment quickly if an unforeseen event occurs. 

Working with counsel, a company can address these potential concerns by structuring its Reg A offering to include redemption or early payment features that may be used to provide a certain level of liquidity for investors. These provisions may include discounts on the investor’s capital or notice requirements (often 90 days), but they also deliver a degree of risk reduction for the investor.

In addition, companies should remain nimble about the type of security they are offering under Reg A. Consider the case of a client who wished to go to market with a Reg A offering, originally structured to offer equity in the company. During preparation for the offering, the company received feedback from broker-dealers and RIAs that its reception would be stronger among investors if they had a date certain for exiting the investment. In response, the company abandoned the equity structure in favor of a 5.5-year bond offering with a quarterly contingent interest payment (which gives investors greater upside if the company hits certain milestones). While the new structure meant the company was required to increase its asset reserves, it was able to help ensure that its Reg A offering would be received more favorably by the market. 

A Lighter “Load”

Another primary issue when structuring a Reg A offering is the load associated with independent broker-dealers. The company and investors alike may be concerned that the load diverts significant capital away from the enterprise and its core business functions. 

To lessen the immediate impact of distribution-related costs, particularly at the beginning of an offering, many deals have been structured to pay a portion of the independent broker-dealers’ commission upfront with the balance paid over time. The structure may provide renewal features for investments that give brokerage professionals additional fees over time to lower front-end costs. While issuers should be cautioned that this approach will not reduce the load by an enormous sum, it will permit a noticeable front-end reduction that allows more money to remain in working capital for the company’s operations.

Strong working relationships with broker-dealers and RIAs are critical to the process. Outside counsel with close ties to these communities can be particularly helpful in negotiating more favorable load terms and developing creative solutions that can help improve a Reg A offering’s chances of success.

To learn more about how we assist companies through the Reg A process, contact us for a consultation.