October 15, 2018

Reg A Tier 2 Offering: All That You Need to Know

A Reg A Tier 2 offering allows companies to raise up to $50 million in a 12-month period. It has certain specific eligibility, audit and filing requirements.


The Emergence of Reg A Tier 2 Offering


A Reg A Tier 2 offering is one of the two offerings allowed under Regulation A. Under the Securities Act of 1933, every company that seeks to offer its securities for sale to the public must either be registered with the Securities and Exchange Commission, or it must qualify to get exempted from registering itself.


The current rules to allow an exemption are documented under Regulation A. It is a part of Title IV of the JOBS Act. It contains the rules under which the qualifying companies can offer their securities for sale through equity crowdfunding. The purpose was to allow small and medium businesses to raise money, without the complications of a public offering and registration and to allow the small non-accredited investors to participate in the growth of the early-stage companies.


The Basics behind Reg A Tier 2 Offering


On March 25, 2015, the SEC adopted the rules to expand the Regulation A into two tiers.


Tier 2 offerings allow companies to raise up to $50 million per year. This amount must include no more than $15 million from the affiliates of the issuer. These companies do not need to go through  the SEC registration process. However, they do need to provide an offering circular to investors, including the balance sheets, income statements, cash flows and stockholders’ equity for the two most recent fiscal years. The circular also needs to be reviewed and vetted by the SEC.


A Tier 2 offering allows the accredited investors to buy the securities without any limitation. However, there are certain restrictions with regard to the non-accredited investors. The non-accredited investors cannot invest more than 10% of their annual income or net worth when buying securities, under a Tier 2 offering. This limit is not applicable, when the securities being bought are going to be listed on a national securities exchange after qualifying.


How is it Different from a Tier 1 Offering


A Reg A Tier 2 offering is different in several respects from the Tier 1 offering.


    • The basic difference is in the amount that can be raised through each type of offering. A Tier 1 offering allows companies to only raise up to $20 million in a 12-month period, while the Tier 2 offering allows companies to raise up to $50 during the same period.


    • Tier 1 offerings are more complex,  since they need to satisfy the investing regulations of each state that their investors live in. By contrast, Tier 2 offerings do not have any state by state filing requirements.


    • There is no limitation on how much money investors can invest in a Tier 1 offering, while there are certain restrictions on how much money non-accredited investors can invest in a Tier 2 offering.


    • For a Tier 1 offering, a company is not required to have their financial statements audited,  while for the Tier 2 offering, the companies are required to include audited financial statements in their offer documents. The audit needs to be done either in accordance with the generally accepted auditing standards in the United States, or the standards issued by the PCAOB.


    • There are fewer filing requirements after making a Tier 1 offering.  This is because the audit reporting and half-yearly profit and revenue reporting are not mandatory.  By contrast, when making a Tier 2 offering, the company needs to file annual, semi-annual and current reports with the SEC on an ongoing basis.


Advantages of a Reg A Tier 2 Offering


Most of the companies following the equity crowdfunding path have chosen a Tier 2 offering. A Tier 2 offering has the following advantages:


    • Tier 2 offerings are preempted from the state securities registration requirements. This makes them less complicated and it is easier to offer securities in different states to a large number of investors. Tier 2 offerings are reviewed only by one regulator, the SEC.


    • The offering can be made for any amount up to $50 million.


    • Tier 2 offerings allow for the acceptance of cryptocurrency payments and can also be used for Initial Coin Offerings and Security Token Offerings.


    • Tier 2 issuers can stop ongoing reporting by filing a Form 1-Z exit report, if its securities are held by less than 300 investors.


Drawbacks of Tier 2 Offering


    • Tier 2 offerings have strict audit requirements. The financial statements included in the offering circular must be audited, according to U.S. standards. The auditor must be Independent but does not need to be PCAOB-registered.


    • For a company to receive an exemption from Exchange Act registration for Tier 2, it is required to engage the services of a transfer agent. The transfer agent must be registered with the SEC.


    • There are extensive post-offering filing requirements for Tier 2 offerings. Tier 2 issuers have an ongoing responsibility to file annual reports on Form 1-K, semi-annual reports on Form 1-SA, and current reports on Form 1-U. The companies are also required to file special reports in certain situations.


The Bottom Line


Regulation A and the amended version, Regulation A+, provided opportunities for private companies to solicit investments from the general public. The process became easier, without the need for complicated public offerings, and also allowed for small investors to put in  modest amounts of money in growing companies, in exchange for an equity stake in the companies.


The Regulation was split up into two tiers of offerings,  based on the amount of capital that can be raised and certain regulatory requirements. Overall, Tier 2 offerings  are an excellent option with a higher limit on the amount of capital raised, and fewer statewide restrictions. It does require complex procedures, like audits and post-offering filings.  However, it works best for many private companies.


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