Who Can Use Regulation A?
Figuring out whether your company is eligible to use Reg A can be complex. I can help you. Reg A issuer eligibility generally depends on the analysis of seven items.
1. Your company has to be “organized” and have a “principal place of business” in America or Canada. If you have an international footprint, where your “principal place of business” is located can be difficult to discern.
2. Your company cannot be a blank check; it has to have a real business plan and some operations. And if your plan is to go buy another company, you must identify your actual, bona fide targets. Said differently, SPACs cannot use Reg A because actual acquisition targets, not just industries, must be identified. If want to use Reg A but you don’t have operations yet, or if you want to buy another company, talk to a securities attorney.
3. Investment companies, private funds, and BDCs.
Business development companies (BDCs) and registered investment companies cannot use Reg A. Neither can investment companies that are “required to be registered.” Here, “required to be registered” is lawyer-speak for investment companies that are not registered under the Investment Company Act and are not exempt from registration.
4. Reg A disqualification. Your company cannot be disqualified under Rule 262 of Reg A. Like in Reg D, Reg A has bad-actor rules.
5. Current in reporting. If your company is already a Reg A-reporting or 34-Act-reporting company, it must be current for all reports “required to be filed” by Reg A or the 34 Act.
6. Oil and Gas. Your company cannot use Reg A to issue “fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights.”
7. 12(j) – No Section 12(j) orders against your company’s securities within the past five years (getting a 12(j)’d is a big deal; avoid at all costs).
Can Private Funds Use Reg A?
What about private funds, can they use Reg A? This one is tricky.
Even though 3(c)(1) and 3(c)(7) funds (i.e., private funds) are exempt from registration, and thus, under Reg A’s rules, could be eligible to use Reg A, the Investment Company Act prohibits private funds from doing public offerings. Because Reg A is a public offering, private funds cannot use Reg A.
Fun(d) Fact: did you know that your company can be an investment company if you merely propose to “engage primarily, in the business of investing, reinvesting, or trading in securities”? Check out the definition of “investment company” in the Investment Company Act. You don’t need to have purchased a single security to be captured by the Investment Company Act.
Those are the basics. None of this is legal advice for your situation. After reading this, if you feel like you need to hire securities counsel, your instincts are good. Let’s talk.
What Are Regulation A Dollar Caps?
Regulation A has four important dollar caps: the offering cap, the resale cap, the affiliate resale cap, and the non-accredited investor cap. The first three relate to something your company can control: how much you and your selling shareholders are offering. The non-accredited investor cap is something your company does not control, though it is still important for you to track.
Offering Cap
The offering cap amounts for Reg A are $75 million for Tier 2 offerings and $20 million for Tier 1s. Those $75/20 million figures are every 12 months; it’s a rolling calculation that looks back to what you’ve sold the previous year.
Resale Cap
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. 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 below.
Affiliate Resale Cap
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.
Non-Accredited Investor Cap
Unlike the other caps, the non-accredited investor cap 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.
Clearing 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.
The cap for non-accredited investors exists only for T2 offerings of securities that are not exchange-listed.
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. And for entity-investors, the ten percent is measured off of revenue or net assets for the most recent fiscal year end. 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.”
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.
Considering a Reg A Offering?
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).
Charlie Guidry served for more than 10 years in the SEC’s Division of Corporation Finance, Office of Small Business Policy and in the Division of Trading and Markets, Office of Chief Counsel. He contributed to rulemakings on Regulation A, the accredited investor definition, finder registration, and Regulation Crowdfunding. Previous to his experience at the SEC, he was an associate at a large law firm in DC for 8 years.
