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Understanding Investor Limits in Regulation A Offerings

by | May 25, 2022 | Regulation A

Regulation A is designed to give companies the opportunity to raise significant capital from accredited and non-accredited investors through the sale of securities without a lot of the costs and red tape associated with a traditional public offering.

Companies offering securities under Reg A’s exemption framework can sell to members of the public under two tiers, Tier 1 and Tier 2, both of which have different requirements and limitations for issuers and critically, for potential investors.

Both offering tiers require that investors are issued or given access to an offering circular. The circular includes information about the offering and the securities for sale, potential risks of an investment, how proceeds from the sale may be used, and other relevant information. In addition, the circular will include details about the company’s management, performance, financial statements, and future plans.

Regulation A offerings must also be qualified by staff from the U.S. Securities & Exchange Commission. A company may not accept subscriptions for the sale of securities until the SEC has qualified the offering. The qualification process involves a period of comment and response between the company and the SEC.

Tier 1 Offerings

Under Tier 1, companies may raise up to $20 million under Reg A during any 12-month period. After qualifying its offering circular, companies making a Tier 1 offering have no other reporting obligations to the SEC, other than filing a final status report once the offering has concluded.

Tier 1 companies, however, are subject to blue sky laws (state-level securities laws) in the states in which the offerings are being conducted. State-level securities regulations are generally in place to protect individual investors against fraud. These blue sky laws require filings in each state where sales activity is taking place.

Tier 1 includes no limitations on who can invest or how much they can invest in the offering. The blue-sky requirement has much to do with Tier 1’s investor profile. The extra level of state-level regulatory scrutiny is designed to protect individual, Main Street investors who might purchase Reg A securities.

Tier 2 Offerings

Under Tier 2, a company may offer up to $75 million under Reg A in any 12-month period. There is no minimum offering amount under a Tier 2 offering, so any issuer may elect to use Tier 2.

Unlike Tier 1, Tier 2 offerings include limitations on the types of investors who can participate if the securities are not going to be listed on a national securities exchange. The same state blue-sky laws and filings apply to Tier 2 offerings. In addition, issuers are required to make annual, semi-annual, and various current repairs with the SEC. 

Individual investors (or couples who invest together) are limited to investing no more than 10 percent of their annual income or their net worth, whichever is greater. Net worth, however, may not include the value of a primary residence and any loans secured by that residence.

KVCF PLC has extensive experience working with financial institutions, companies, and broker-deals on Regulation A offerings. To learn more about Reg A and its investment limits and securities offering requirements, contact us for a consultation.