Reg A Caps, Part 1

Regulation A has four important dollar caps: the offering cap, the resale cap, the affiliate resale cap, and the non-accredited investor cap. Here, I explain the first three, which relate to something your company can control: how much you and your selling shareholders are offering. In the next blog, I’ll talk about the non-accredited investor cap, which your company does not control, though it is still important for you to track.

I think most people know the offering cap amounts for Reg A: $75 million for Tier 2 offerings and $20 million for Tier 1s. But did you also know that it is $75/20 million every 12 months? It’s a rolling calculation that looks back to what you’ve sold the previous year.

Here’s an example: On July 1, your company qualifies its first 1-A for $75 million. Because your company is so incredible, by December you’ve raised it all. Kudos! Here’s the thing, though: because the cap is a rolling 12-month look-back, you cannot raise another dollar under Reg A until, at the earliest, July 1, one year after you were initially qualified.

And when you file your next 1-A, say in June, getting ready to qualify on July 1, you are likely to get a comment from SEC Staff asking for the timing of your previous sales. This is because Staff is thinking about the rolling 12 month look-back. Just because you qualified on July 1 last year, that doesn’t mean you made sales then. If you started your offering on July 1 but, try as you may—and you absolutely need to try, I will blog about delayed primaries later—you sold nothing until September 1, then you cannot qualify any additional securities until the amount you sold on September 1 rolls off the 12 month look-back. And once it does, you can qualify that amount. And on and on until all of the $75 million you sold rolls out of the look back.

Note that this example assumes you sold $75 million in your first T2 offering. If instead you sold $50 million, then you have an additional $25 million that you can get qualified at any time. No need to wait for previous sales to roll off.

What about resales?

Resales can be offered using Reg A, but, like everything, you need to get the details right. I think of Reg A resales in two parts: resales in the first 12 months of your very first Reg A offering and then everything after that.

In the first 12 months of your company’s first Reg A offering, the resale cap is 30% of the total offering amount. You cannot qualify a resale portion of your 1-A that is more than 30% of your total qualified offering amount. After 12 months elapse from your initial qualification date, the 30% cap goes away. Relatedly, you can have a 100% resale 1-A, but you must wait 12 months from your first one (and it cannot be all affiliate resales, see the next paragraph).

In Reg A, affiliate resales are special and have their own cap: $22.5 million for T2 and $6 million for T1. And, because affiliate resales are still resales, the 30%-in-the-first-12-months cap we talked about above still applies. This is tricky; don’t get caught out if your offering includes sales by your company’s affiliates.

If you have any questions on these caps, and the questions can get interesting (e.g., are credit card fees included in the caps? broker fees paid by investors?), please email me. I’d love to work with you on your Reg A offering (or, if you are a lawyer, I can consult with your firm on any niche Reg A questions or as an expert witness).