Earlier this year, the Securities and Exchange Commission boosted the amount of capital companies may raise through exempt offerings under Regulation A. The new rules increased Regulation A’s Tier 2 annual offering cap to $75 million from $50 million and the cap on secondary offerings under Tier 2 from $15 million to $22.5 million.
The higher limits have come at an opportune moment. Demand for alternative investments has increased substantially in the last few years as investors seek options to shield themselves from the volatility of the public markets, political turmoil, and COVID-19-era economic uncertainty.
For potential issuers, particularly Main Street businesses, the new limits are designed to make Regulation A an even more effective tool for raising capital. And they arrive at a time when the review process for well-prepared issuers has been accelerating.
Given the recent changes and increasing investor interest, let’s consider a few basic issues that set Regulation A apart from other exempt offerings and briefly explore how such offerings are sold.
Regulation A is a method of offering securities that are exempt from registration under the Securities Act of 1933. Registration often is associated in the public’s mind with initial public offerings on Wall Street. However, under U.S. law, any security offered in interstate commerce must be registered with the SEC and meet the agency’s reporting requirements.
That is, unless an exemption applies. Perhaps the best-known types of exempt offerings are under Regulation D, which encompasses private placements and other transactions that are almost entirely aimed at accredited (i.e., high net worth and sophisticated) investors.
Unlike Regulation D offerings, Regulation A allows for general solicitation of potential investors. In other words, securities can be marketed however the issuer sees fit. In addition, securities can be offered to non-accredited investors as well as accredited investors, opening investment opportunities to anyone regardless of their net worth or level of sophistication. Some limitations do apply. Non-accredited investors may not invest more than the greater of 10 percent of their net worth or their annual income, excluding the value of their homes, in a Tier 2 Regulation A offering.
Regulation A securities may also be traded in secondary transactions. And the securities may be freely sold among individuals without any securities law implications to the issuers—a significant difference from Regulation D, which requires securities to be held for a certain time.
In essence, Regulation A offerings have all of the practical attributes of public securities without many of the regulatory expenses and burdens. While there are reporting requirements associated with Regulation A, they are streamlined and much less burdensome than those associated with publicly registered securities.
THE MARKET FOR REG A OFFERINGS
To date, Regulation A offerings have been most successful in the independent broker-dealer and registered investment advisory (RIA) spaces.
Large financial institutions like a Citigroup, Blackstone or Goldman Sachs generally prioritize the traded markets and direct their sales forces about the products they will sell at any given time. In the independent broker-dealer or RIA environment, a Regulation A issuer is more likely to encounter financial professionals seeking alternative investments to meet their clients’ specific investment goals.
However, reaching independent broker-dealers and RIAs and getting them interested in a company’s securities requires more than simply issuing an offering circular and hoping for the best. Companies and their advisors must craft a strategy to garner broker-dealer interest and motivate them to sell the offering.
In a recent video series on Regulation A, Ray Davis of Red Oak Capital Group, a company that has conducted several Regulation A offerings, noted that once an issuer “penetrates the independent broker-dealer channel, you have a selling group that, in my opinion, far exceeds what you do in a crowdfunding platform or by trying to go direct [to potential investors].” Red Oak provides private equity and debt capital solutions for commercial real estate projects.
“With each broker-dealer, you get on average 100 or 200 sales reps,” Davis said. This means that a company could have the ability to exponentially raise capital…is second to none with the independent broker-deal channel.”
Davis sat down earlier this year with KVCF partner Rob Kaplan for a lively, six-part web discussion on what it’s like for companies to use Regulation A to raise capital. Watch the entire series here. And for additional information on how we assist companies with Regulation A offerings, contact us for a consultation.