October 11, 2018

Regulation A+ Tier 1 Offering Explained

Registration A+ allows two kinds of offerings-Tier 1 and Tier 2. Reg A+ Tier 1 offerings allow companies to raise up to $20 million per year from non-accredited investors and accredited investors.


Background of Reg A+ Tier 1


Under the U.S. Securities Act of 1933, whenever a private company offers to sell its securities, it must be registered with the United States Securities and Exchange Commission (SEC). Regulation A provides an exemption to private companies that want to raise capital through the general public, from the registration requirements mandated by the state law.


The purpose of Regulation A offerings is to allow small and medium scale companies to save on the cost of a normal securities and exchange commission registration and also allow them to make the offering process to non – accredited investors. The companies need to file an offering statement on Form 1-A on the EDGAR (Electronic Data Gathering, Analysis and Retrieval).


On March 25, 2015, Regulation A was expanded into two tiers(Tier 1 and Tier 2) in order to implement Section 401 of the Jumpstart Our Business Startups Act. Both tiers have certain basic requirements including issuer eligibility provisions, bad actor disqualification provisions and disclosure requirements.


Companies that are seeking to raise up to $20 million, can select either of the two tiers for their offering. The differences between the offerings made under Tier 1 and Tier 2  include the volumes of capital that can be raised under each offering and some separate mandatory requirements separate for each tier.


Securities That Can be Sold in Reg A+ Tier 1 Offering


The following securities are eligible to be offered under Reg A+:


a) Equity Securities

b) Debt Securities

c) Convertible Securities (which can either be converted or exchangeable into equity stakes)

d) Guarantees of Securities


Regulation A+ allows companies to test the waters, either before or after filing the offering statement. In Tier 1 offerings, testing the waters is subject to state securities provisions, which  vary by state. This is the reason why testing the waters may not be feasible in all U.S. states.


Must Know Facts About Reg A+ Tier 1


1) The Volume of Capital Raised – The amount of capital that can be raised through a Reg A+ Tier 1 offering is $20 million in one year. The Tier 1 offering should not include more than $6 million of securities, on behalf of the sellers that are affiliates of the issuer company.


2) Filing Requirements – The issuing company needs to file an offering circular which must be approved by the Securities and Exchange Commission. This offering circular can be compared to a prospectus in a registration statement.


3) Blue-Sky Laws – In order to raise capital through a Tier 1 offering, a company must follow the Blue Sky investing regulations that apply to every state in which the investors reside. The issuing company should contact the state securities regulators of those states, in which it wants to offer and sell the securities.


Some states allow the issuing companies, which are offering their securities for sale in many states, to get reviewed through a coordinated state review program by the North American Securities Administrators Association (NASAA). Tier 1 offerings are best suited for small-scale companies that are looking for local investors such as in only one or two states. Some banks are also exempt from the Blue-Sky requirements of every state.


4) Reporting Requirements – Ongoing public financial reporting is not required for Tier 1 offerings. This implies that the regulations do not require companies to produce reports during the process on a continuous basis. However, the issuing companies  must produce a report on the final status of the offering. They are also required to update certain information, by electronically filing a Form 1-Z exit report with the SEC, within 30 calendar days after the termination or completion of an offering.


5) Financials Review Requirements – The issuing company must have its financials reviewed for a Tier 1 offering and have them labeled as unaudited. The following financials for the two most recent fiscal years are required to be filed as part of the offering circular:


a) Balance Sheet

b) Income Statement

c) Cash Flow Statement

d) Stockholders’ Equity


Auditing of the financials is not a requirement in the majority of states. However,  any previously audited financial statements must be used, if they meet certain pre-decided requirements.


How Does the NASAA System Work for Reg A+ Tier 1 Offerings


To simplify the Regulation A+ on the state level, NASAA has developed a new system for different states. The issuing company must send the proposal offering to the administrator of the system, who then passes it on to different states.


The individual states then either approve or decline the offer. Their decision is conveyed to the issuing company. The whole process takes approximately 21 working days to complete, after filing the offering circular to the administrator.


The Advantages of a Tier 1 Offering Over a Tier 2 Offering


The re are pros and cons for both kinds of offerings. The advantages of a Tier 1 offering compared to a Tier 2 offering are:


  1. Financials do not need to be audited.


2) Filing the results of the company every six months and an annual audit is not required.


Final Words


Regulation A+ is a promising way for private companies to raise capital through Tier 1 and Tier 2 offerings, without incurring the high costs and other hassles of a public offering process.


Tier 1 offerings are best for small or medium scale companies which want investors from one state and for banks which are not required to abide by each state’s Blue-Sky regulations. If the investors for an offering are from outside the United States, it is an ideal situation for a Tier 1 offering.


This is because it does not require the filing for a Blue-Sky exemption with any U.S. states. Their outcomes are also easier to track, because of the mandate of reporting on the completion or cancellation of the offering.


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