Reg A Caps, Part 2

In the sister blog to this one, we went over the offering cap, the resale cap, and the affiliate resale cap. All of these are, in some sense, controllable by you. You decide the total amount of your offering. You choose the percentage of the offering allocated to selling shareholders and to your affiliates.

This fourth cap, though, is outside of your control. It applies to your non-accredited investors, governing how much they can invest. You have to trust them to apply the cap correctly—read on to learn how to get comfortable that these investors are not blowing the cap.

But first I want to clear up a potential point of confusion: no investor cap exists for (i) accredited investors investing in either a Tier 1 (T1) or Tier 2 (T2) offering; (ii) non-accredited investors investing in a T1 offering; and (iii) non-accredited investors investing in a T2 offering of securities listed on a national securities exchange. In other words, non-AIs are not capped in every Reg A offering.

The cap for non-accredited investors exists only for T2 offerings of securities that are not exchange-listed, which, in fairness, is most of the Reg A T2s.

If your investor is a human, the cap is ten percent of the larger of her annual income or net worth—with annual income and net worth determined under Reg D’s “accredited investor” definition. (For reasons, I probably need to blog about that definition, too.) And for entity-investors the ten percent is measured off of revenue or net assets for the most recent fiscal year end. A challenge for my fellow math nerds: what is the largest amount a non-accredited human can invest? Same question for entities.

BTW, if you are qualifying convertibles and their underlying, know that the non-accredited cap includes the “actual or maximum estimated conversion, exercise, or exchange price for any underlying securities that have been qualified.”

You may see a problem: “How do I know what my investor’s personal cap is?” The Commission thought of this, and Reg A allows you to rely on a representation from the investor that he is complying with the cap. Note that you cannot rely on a representation you know is false—as one example, a human non-accredited investor can never truthfully represent that she is complying with the cap when buying more than $100,000 of securities.

So between the two blogs we’ve covered the four Regulation A caps. Please email me with questions; I’d love to work with you on your Reg A.