Regulation A (Reg A) allows eligible companies to access investment capital without bearing the costs of a full public offering. Yet even in this streamlined process, companies should be prepared for substantial scrutiny from the Securities and Exchange Commission (SEC).
A key to successfully maximizing Reg A’s advantages is full awareness by a company’s management team that the company will face disclosure-related and other questions from SEC staff. Failing to anticipate and adequately address these questions may add weeks and months to the Reg A qualification process.
Preparation is key. Companies that successfully—and rapidly—navigate the Reg A qualification process often spend months reviewing policies and procedures and their financial models before making an initial Reg A filing. They also work with outside counsel who are intimately familiar with the Reg A process and have a keen understanding of the kinds of issues most likely to trigger questions from the SEC.
THE NUTS AND BOLTS
Reg A 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, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
Certain basic requirements apply to both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, disclosure requirements, and other matters. Additional requirements apply to Tier 2 offerings, including limitations on the amount a non-accredited investor may invest, requirements for audited financial statements and the filing of ongoing reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators.
To begin the qualification process, issuer’s counsel prepares and files an initial offering statement on, Form 1-A, which includes an offering circular. The offering circular serves as the primary disclosure document. Within 30 days, the SEC will respond with initial comments on the offering disclosures or notify the issuer that the SEC staff had no comments.
No comment letters do occur, but the SEC usually has some questions and comments. The questions and comments are not designed to weigh whether an offering is a strong investment. Instead, the SEC’s questions and comments are aimed at to ensuring that the company has complied with the SEC’s legal requirements and that the company’s disclosures are accurate, complete and can be easily understood by potential investors.
The SEC will occasionally raise points about the company’s eligibility to make an offering. More often, comments focus on the clarity of the disclosure, with SEC officials asking for additional information regarding assertions made in the offering circular.
This is where companies that have not carefully planned in advance can face roadblocks in bringing their Reg A offering to market. Technically, the SEC’s comment and response process could continue indefinitely if the SEC is not satisfied that a company is providing sufficient answers to its questions. In practice, companies have experienced lengthy delays and have suspended their offerings because of poor responses to SEC comments.
A carefully crafted and complete disclosure filing—one that includes critical information about the company and the security being offered—can help ensure that the process remains on track. If and when SEC questions and comments arise, the company’s management team should remain focused on the process and work closely with experienced counsel to provide serious and sophisticated answers to the queries.
Reg A, in its present form, was created by Congress in 2012. Early on, we advised clients to expect a process of 120 to 180 days. We now tell clients to budget 90 days for the Reg A process. This includes preparation of the initial offering circular, as well as the 60-day comment and response period. In some cases, we have seen deals move through the commission in as little as 45 days, depending on SEC workload and timing.
WHY EXPERIENCE MATTERS
This accelerated pace is occurring because the SEC is more familiar with the issues that may trigger concerns in a Reg A filing. Attorneys who specialize in securities law and Reg A offerings are now better able to anticipate comments and prepare clients in advance.
In addition, Reg A offerings may include more complex financial structures that require specialized legal knowledge. For instance, Reg A bond offerings require additional governance features, controls, and an indenture that must meet certain substantive requirements under federal law. This requires counsel to have knowledge of securities law, the provisions of the Trust Indenture Act of 1939, as well as the Reg A process.
Reg A also has unique logistical requirements that may not be readily apparent to counsel and companies new to the process. For instance, transfer agents or bond trustees are required, as are financial printers with expertise in the SEC’s EDGAR system. Establishing relationships with providers in these areas can be difficult. An experienced Reg A law firm can assist in locating service providers in these areas and in negotiating agreements with them.
Reg A can provide a fast and efficient means for raising investment capital. To maximize its benefits, a company must carefully prepare and select knowledgeable counsel who can ensure that an offering is moving in a highly efficient manner. To learn more about the Reg A process, contact us for a consultation.