I concluded my last article with the comment that the landscape regarding access to capital is constantly evolving. The JOBS ("Jumpstart Our Business Startups") Act of 2012 provided for a new category of smaller companies to have easier access to public markets due to reduced filing requirements for a form of Initial Public Offering ("IPO") and reduced ongoing regulatory reporting requirements. Well, I was wrong - evolution turned into revolution.

In March 2015, the SEC surprised the business community by releasing final rules amending Regulation A ("Reg A"), effectively substantially improving a structure which provides for small companies to access capital by executing a "mini IPO" through an Offering/Registration Statement (Form 1-A) filed with the SEC. The process is significantly less burdensome and costly to an issuer than the typical structure associated with the preparation of an S-1 Registration Statement and has been dubbed an "S-1 light" process.

The new regulations (453 pages) referred to as Regulation A+ includes two Tiers of offerings with differing criteria depending on the maximum dollar amounts being raised.

For the sake of clarity and focus I use the terms Reg A and Tier 1 as these apply to the audience of smaller potential issuers. I also do so with a note of caution to you that what follows is a general summary.

Overview

Reg A offerings, similar to other registered offerings, require that an Offering Statement be filed with the SEC.

Under Tier 1, offerings can be made by U.S. or Canadian issuers at a fixed share price up to $5.0 million in any 12-month period, soon to be increased to $20.0 million. The $5.0 million does not need to be raised all at once in the 12 month period.

Investors must be provided with the final qualified Offering Statement prior to the sale of securities. The latter can be accomplished with the current "access equals delivery" model, whereby investor access to the Offering Statement via the internet and the SEC's EDGAR database satisfies this requirement.

A company does not need to have a share trading platform to initially submit an Offering Statement to the SEC but will need a platform eventually to provide for liquidity to shareholders. This can include the OTC Markets Group or other Exchange.

If a trading platform for shares already exists with a corporate identity, transfer agent, securities counsel and a financial officer familiar with the public company arena, the total cost of the offering is reduced.

Certain entities are precluded from Reg A offerings, including shell, investment and blank check companies.

State "Blue Sky" Laws & Audit

Similar to other offerings, and despite federal SEC review and approval, the biggest difficulty in executing a Reg A offering is the current necessity for a company to navigate the "blue sky" laws of each state securities commission where the offering is selected to take place, which can add to a delay in the effective date and expense.

The selection of states which mirror SEC rules and are most likely to have investors most likely to be interested in your offering can mitigate this situation to some degree.

Also, although the SEC does not require an annual audit, most states will. 
  

Substantially Reduced Regulatory Requirements

There are some annual informational filing requirements but financial statements can be simpler and do not need to be audited for SEC purposes.

Most importantly, the company is not subject to SEC reporting obligations going forward after the offering - Annual & Quarterly reporting (Forms10-K and 10-Q), Sarbanes-Oxley Act obligations, continuous disclosures of material events or Proxy Statements. It can go forward as a "non - reporting entity" after the initial transaction if it so chooses.

The Ability To "Test The Waters" With Investors At An Early Stage

Reg A allows for pre-qualification solicitations of interest, commonly referred to as "testing the waters."   

As soon as the Offering Statement is submitted to the SEC, rather than the later SEC approval date, with some minor additional paperwork to the SEC, the company can determine market/investor interest in their securities. This includes general solicitation, advertising, oral solicitation and the ability to publish or deliver a written document to prospective purchasers or make scripted radio or television broadcasts.

Freely Tradable Securities And Non - Accredited Investors

Securities sold in a Reg A offering are freely tradable, not subject to transfer restrictions and are not restricted securities under Rule 144. This includes any purchaser - family, friends, etc.

Securities can also be sold to non-accredited investors and can be sold for non-cash consideration, such as services.

Existing Shareholder Sales

Any existing shareholder, but only with the permission of the company and at the company's sole discretion without prejudice, may re-sell their shares into the Reg A to the extent such sales don't exceed 30% of the total dollar value of the offering.; e.g., an offering of $2.0 million allows for $600,000 in total sales by existing shareholders. The liquidity implications here for owners with existing shares are obvious.

Personally, being involved in the Reg A process with clients, I am pleased by the new rules and look forward to even more opportunities to assist clients. In summary, to me it appears that the SEC has almost created a new public venture capital market.

At Nperspective we understand the challenges encountered when considering public and private capital markets' transactions and have team members with extensive expertise who have successfully provided cost-effective expert guidance to clients with resource constraints, assisting in navigating all aspects of this complex process, including Reg A.

If your company or one of your clients may benefit by our experience and knowledge, contact Russell Slappey at 407.448.1781 or rslappey@npcfo.com for a complimentary consultation.