Regulation A+ Mini-IPO

The JOBS Act (“the Act”) was signed into law in 2012 to provide companies easier access to investor capital in America. On June 19, 2015, the SEC issued new final regulations to implement Title IV of the Act—Regulation A+. Regulation A+ offerings (“Reg A+ offerings”), also called mini-IPOs, are exempted from many of the registration requirements of the Securities Exchange Act of 1934. Companies that undergo a Reg A+ offering can raise capital from both accredited and non-accredited investors with much smaller fees than a traditional IPO. These mini-IPOs (which exhibit many similarities to crowdfunding) are very new in the markets but show great potential as an alternative form of equity financing for small- to mid-size growth-stage companies. They give unprecedented access to both Main Street and Wall Street investors.

This article will explain the basics of Reg A+ offerings and provide examples of companies that have executed this type of offering.

Regulation A+ Basics

Reg A+ offerings make it easier for companies to access funding by limiting the regulatory requirements to attract Main Street and Wall Street investors. Companies may issue debt and/or equity securities, including convertible debt securities and warrants, as part of their offering. There are two tiers of Reg A+ offerings:

• Tier 1. Securities offerings of up to $20 million in a 12-month period
• Tier 2. Securities offerings of up to $50 million in a 12-month period

Similar to an IPO, Reg A+ offerings create publicly traded shares that are available to both individual and professional investors. However, Reg A+ offerings are primarily marketed toward retail investors—normally the existing customer base of the company—rather than institutional investors, who are typically the focus in a traditional IPO. This crowdfunding focus, along with less-stringent regulatory requirements, makes Reg A+ offerings an attractive option for young companies looking for liquidity and increased customer engagement with their brand.

Reg A+ is available to any non-public U.S. or Canadian company that is not:

• a blank check company (like a SPAC used in a Reverse Merger),
• an investment company, or
• disqualified under the SEC’s “bad actor”¹ rules.

The Regulation A+ Process

Investment Solicitation – Testing the Waters

The JOBS Act allows a company to gauge public interest (“test the waters”) in a potential Reg A+ offering before formally announcing or filing a commitment to execute the offering. This investigatory work is crucial to company leaders because it helps them determine if the offering is likely to succeed, and if the process will be worthwhile.

To test the waters, company leaders (or a representative) normally talk to potential investors and ask them how much they would consider investing if the company decided to go through with the offering. An investor’s expression of interest is not binding, but it can be very helpful for the company leaders. A company may test the waters before or after filing its Offering Circular with the SEC.

SEC Form 1-A (Offering Circular)

Both tiers of Reg A+ offerings require that the company file Form 1-A (also called the Offering Circular) with the SEC. In its Offering Circular, a company will provide information about its desired offering tier (1 or 2), financial results (see the next section), and business, among other details. A company can file and amend its Offering Circular confidentially with the SEC before releasing it to the public. This allows the company to correspond with the SEC and make corrections to its Form 1-A outside of the public eye—an important precaution in the event that major amendments are needed. However, a company must publicly file its final Offering Circular with the SEC no later than 21 calendar days before qualification².

State Laws and Qualification (Blue Sky Qualification)

Tier 1 offerings are not exempt from state securities law registration and qualification requirements (“blue sky” laws).

Comparatively, all investors in a Tier 2 offering are treated as “qualified purchasers” under the Investment Company Act³, so all Tier 2 offerings are exempt from state securities law registration and qualification requirements.

Financial Statements

Both Tier 1 and Tier 2 offerings require financial statements for the two prior fiscal years (or for as long as the company has been in existence if less than two years) to be included in the Form 1-A. Notably, Nasdaq recently heightened requirements for its exchange to require two full years of operating history prior to a Reg A+ offering. The balance sheet in the financial statements may not be dated more than nine months before the date of qualification. If a company’s filing is more than nine months after its most recent fiscal year-end on the balance sheet, it must provide interim financial statements covering a period of at least six months.

Tier 1 offerings do not require audited financial statements. However, for a Tier 2 offering, the annual financial statements must be audited in accordance with US Generally Accepted Accounting Principles (GAAP) or the auditing standards of the Public Company Accounting Oversight Board (PCAOB). Interim financial statements do not need to be audited.

Investor Limitations

There are no limitations on the types of investors in a Tier 1 offering.

For a Tier 2 offering, there is an investment cap for non-accredited investors⁴. If the non-accredited investor is an individual, s/he may not invest more than 10 percent of the greater of annual income or net worth. If the non-accredited investor is an entity, it may not invest more than 10 percent of the greater of annual revenue or net assets at fiscal year-end. However, if the securities will be listed on a national securities exchange (such as the NYSE or Nasdaq), this limit for non-accredited investors does not apply.

Trading on a National Securities Exchange

Once a company completes a Reg A+ offering, its securities are freely tradeable; however, additional requirements must be met to trade on a national securities exchange like the NYSE or Nasdaq.

Reg A+ permits an issuer in a Tier 2 offering to register its securities on a national securities exchange under the Securities Exchange Act of 1934, but this requires additional compliance on top of the normal Regulation A+ rules. If a company provides disclosures in Part II of Form 1-A that comply with Part I of Form S-1, it may file a Form 8-A short-form registration statement rather than the longer Form 10 to list its securities on a national exchange. To qualify for this exception, financial statements must be audited by a public accounting firm that is registered with the PCAOB. For more information on the Form S-1 requirements, see our article on Drafting an S-1.

Once a company registers under the Exchange Act, its Regulation A+ reporting obligations are suspended and it is treated as an emerging growth company under the JOBS Act. From then on, it must meet the ongoing reporting requirements of a public company.

Ongoing Reporting Requirements

Tier 1 issuers must file a Form 1-Z exit report no later than 30 calendar days after completing or terminating a Reg A+ offering. After the exit report is filed, there are no ongoing reporting obligations for Tier 1 issuers.

Tier 2 issuers are required to file annual (Form 1-K), semiannual (Form 1-SA), and current reports (Form 1-U) with the SEC. An explanation for each of these forms follows:

• Form 1-K (annual). The annual report is like a Form 10-K and is due within 120 calendar days of the company’s fiscal year-end. It includes audited financial statements and information about the company’s operations.
• Form 1-SA (semiannual). The semiannual report is like a Form 10-Q with fewer disclosures. It is primarily composed of unaudited financial statements and a MD&A section. It must be filed within 90 days after the end of the first six months of an issuer’s fiscal year.
• Form 1-U (current report). The current report for Reg A+ companies is like a Form 8-K but with fewer triggering events. A Form 1-U must be filed within four business days after the occurrence of major events, such as a bankruptcy, a change in control or executive, or a fundamental change in business or operational plan.

As mentioned in the prior section, if a company registers under the Exchange Act, its Regulation A+ reporting obligations are suspended, and it must adhere to the reporting requirements of a traditional public company.

Companies That Have Issued a Regulation A+ Offering

As of December 31, 2018, 366 companies had filed for a Reg A+ offering since the new regulation went into effect in 2015. Of these, 262 companies’ offerings have been qualified by the SEC, 107 successfully raised more than $1 million, and 9 are currently listed on the NYSE or Nasdaq⁵. Most Reg A+ failures were attributed to lack of investor interest or insufficient marketing. Therefore, consumer-facing companies with a large and engaged user base are more likely to do well in a Reg A+ offering; this is not necessarily true for a traditional IPO. Because Mini-IPOs are marketed heavily to retail investors, it is helpful to have a large population that already knows of and supports the company—similar to crowdfunding.

The following are examples of of companies that have successfully conducted Regulation A+ offerings along with the amount that was raised:

• Chicken Soup for the Soul Entertainment (Nasdaq: CSSE) – $30 million
• ShiftPixy (Nasdaq: PIXY) – $12 million
• Myomo, Inc. (NYSE: MYO) – $5 million

Recent Developments

In recent months, investors have raised concerns about protecting investors from misleading or fraudulent company offerings. These concerns emerged when the SEC filed fraud charges against Longfin, which lost 85 percent of its stock price in six days of trading, as reported by the Wall Street Journal. Consequently, the NYSE and Nasdaq have shown less interest in allowing Reg A+ offerings—the NYSE has declined to accept new Reg A+ filings for the time being, and Nasdaq recently heightened the requirements of its exchange to include a minimum of two years’ operating history for any company wishing to go public with a Reg A+ offering.

Conclusion

When the JOBS Act was amended in 2015 to allow Reg A+ offerings, small- and mid-sized growth companies were given unprecedented access to capital markets. However, despite the success of Reg A+ offerings over the last several years, recent concerns over the reliability of filings under the less-stringent Reg A+ requirements have caused major stock exchanges to distance themselves from Reg A+ offerings for the time being. Companies, therefore, should thoroughly weigh the benefits of lower costs and less stringent regulatory requirements against the risk of weak demand from both investors and stock exchanges when it comes to a potential Reg A+ offering.

Resources Consulted

• Bass, Berry and Sims, “FAQs on SEC Regulation A+ Securities Offerings”
• Harvard Law School Forum on Corporate Governance and Financial Regulation, “Regulation A+ Takes Effect”
• Forbes, “New JOBS Act Regulation A+ Will Be a Gamechanger
• Law 360, “SEC Approves Nasdaq Plan to Raise Reg A+ Standards”
• McGuireWoods, “A Guide to Regulation A+”
• Medium, “These 107 Companies Raised $1.5 B via Regulation A+; New Metrics”
• SEC, Amendment to Regulation A
• SEC, Form 1-A
• SeedInvest, “Raising Capital using a Regulation A+ Mini-IPO