Which offering of securities under Regulation A is subject to purchase limitations?

What Is Regulation A?

Under U.S. securities laws, an offering or sale of a security must be registered with the Securities and Exchange Commission (SEC) or meet an exemption. 

Regulation A is an exemption from registration requirements—instituted by the Securities Act of 1933—that applies to public offerings of securities. Companies utilizing the exemption are given distinct advantages over companies that must fully register.

However, there are different tiers, depending on the size of the company, and companies must still file an offering statement with the SEC. The offering must also give buyers documentation with the issue, similar to the prospectus of a registered offering.

Key Takeaways

• Regulation A is an exemption from registration requirements with the SEC that applies to public offerings of securities.
• Regulation A was updated in 2015 to allow companies to generate income under two separate tiers representing two different types of investments.
• Under Tier 1 (maximum of $20 million), companies don't have ongoing reporting requirements but must issue a report on the offering's final status.
• Under Tier 2 (up to$75 million), companies are required to produce audited financial statements and file continual reports, including its final status.

Government Regulations: Do They Help Businesses?

Understanding Regulation A

Typically, the advantages offered by Regulation A offerings make up for the stringent documentation requirement. Among the advantages provided by the exemption can be streamlined financial statements without audit obligations, three possible format choices to use to arrange the offering circular, and no requirement to provide Exchange Act reports until the company has more than 500 shareholders and $10 million in assets.

Updates to Regulation A in 2015 allow companies to generate income under two different tiers. It's essential for investors interested in purchasing securities sold by companies utilizing Regulation A to understand which tier the security was offered.

Every company must indicate the tier under which the security falls on the front of its disclosure document or offering circular. This is important because the two tiers represent two different types of investments.

Regulation A: Tier 1 vs. Tier 2

Companies that use the Reg A exemption can sell their securities utilizing two different tiers, each with its own requirements. However, with both tiers, the issuer must file an offering statement with the SEC, including an offering circular, which serves as the disclosure document for investors.

Tier 1

Under Tier 1, a company is permitted to offer a maximum of $20 million in a 12-month period.

The issuing company must also file offering statements with the SEC, which need to be qualified by state regulators in the states in which the company plans on selling the securities.

However, companies issuing offerings under Tier 1 do not have ongoing reporting requirements but are required to issue a report on the final status of the offering.

Tier 2

Under Tier 2, companies can offer up to $75 million in a 12-month period.

Companies offering securities under Tier 2 are required to produce audited financial statements and file continual reports, including its final status.

However, Tier 2 issuers are not required to register or qualify their offerings with state securities regulators but still must file their offering with the SEC.

Tier 2 offerings have additional requirements such as limitations on the amount of money a non-accredited investor may invest in a Tier 2 security.

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about Regulation A.  Regulation A is an exemption from registration under the Securities Act that allows companies to raise money from the public in securities offerings of up to $75 million.

What is Regulation A?

Regulation A allows companies to offer and sell securities to the public, but with more limited disclosure requirements than what is required for publicly reporting companies.  In comparison to registered offerings, smaller companies in earlier stages of development may be able to use this rule to more cost-effectively raise money. 

How does Regulation A affect me?

Regulation A may provide an opportunity for you to invest in early stage and smaller companies and businesses.  Before investing, you should be fully aware that your investment will involve risk.  Following are some general risks to keep in mind:

• Speculative.  Investments in startups and early-stage ventures are speculative and the businesses may fail.  Unlike an investment in a mature business where there is a track record of revenue and income, a startup often relies on the development of a new business, product or service that may or may not find a market.  The SEC does not pass upon the merits or give its approval to any securities offered. 
• Illiquidity.  Even though there is no resale restriction, you may need to hold your investment for an indefinite period of time.  If the securities are not, and if there are no plans for the securities to be, listed on an exchange where you can quickly and easily trade the securities, you will have to locate an interested buyer when you do seek to resell your investment.  

If I want to invest, what do I need to know?

All investors must be provided with, or given information to access, an offering circular.  You should review the offering circular before making your investment decision.  The offering circular will contain important information such as information about the offering and the securities offered, risks of the investment, use of proceeds, any selling shareholders, the company’s business, management, performance, plans and financial statements.  There may be additional materials that you receive in addition to the offering circular.

Selling shareholders.  The offering may include shares held by existing shareholders.  You may be purchasing resale shares and the proceeds from these resale shares will not be used to fund the company’s development and plans.  The offering circular will disclose whether any shares are being offered by an existing shareholder.

Regulation A allows companies to raise money under two different tiers.  It is very important for you to know which tier the offering is being conducted under.  Companies are required to indicate the tier under which the offering is being conducted on the cover of the offering circular. 

Tier 1 

Under Tier 1, a company can raise up to $20 million in any 12-month period.  For Tier 1 offerings, the offering circular must be filed with, and is subject to review and qualification by, the staff at the SEC and is generally subject to review and qualification by the securities regulator in the states where the offering is being conducted.  The financial statements disclosed in a Tier 1 offering do not have to be audited. 

Qualification.  For both tiers under Regulation A, a company can only accept payment for the sale of its securities once its offering materials have been qualified by the staff at the SEC.

It is therefore important to know whether an offering has been qualified.  Investors, however, should understand that the SEC’s qualification of an offering statement does not mean that the SEC has assessed or approved the accuracy of the offering statement or the merits of the securities offered.

Be aware that fraudsters have in the past characterized certain SEC filings and actions, such as qualifications, as formal approvals in order to mislead investors.

Tier 2

Under Tier 2, a company can offer up to $75 million in any 12-month period.  For Tier 2 offerings, the offering circular is subject to review and qualification by the staff at the SEC, but is not subject to review or qualification by state securities regulators.  Financial statements disclosed in a Tier 2 offering must be audited by an independent accountant. 

If not already listed, securities offered under Tier 2 may be listed on a national exchange to the extent that the company applies for listing and meets the listing requirements for that particular exchange.  The company would then be required to comply with the more extensive ongoing reporting requirements of public companies.

Am I limited in whether and how much I can invest?

There are no limitations on whether you can invest, or how much you can invest, if you are investing in an offering relying on Tier 1.

If, however, you are offered an opportunity to invest:

• in a Tier 2 offering; and
• you are not an accredited investor; and
• the securities are not going to be listed on a national securities exchange upon qualification;

there are some investment limitations of which you should be aware.  In such circumstances, individual investors are limited in how much they can invest to no more than 10% of the greater of the person’s, alone or together with a spouse, annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).

How do I stay informed about my investment?

Companies must disclose information with the SEC using EDGAR but the type and frequency of this information may differ from the information that you may be familiar with when investing in companies listed on a stock exchange, for example. 

Companies relying on Tier 1 do not have ongoing reporting obligations other than a final report on the status of the offering.  Companies relying on Tier 2 do have ongoing reporting obligations.  Following are descriptions of the Regulation A disclosure forms:

Already publicly reporting.  Companies that are already publicly reporting, such as companies that are listed on a stock exchange, generally will be deemed to meet their Regulation A ongoing disclosure obligations by remaining current in their public reporting obligations.

Additional Resources

To learn more about Regulation A, see this website.

For information on how to search for company documents, such as an offering statement on Form 1-A, in the SEC’s EDGAR database, see Using EDGAR to Research Investments.

For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.    

This bulletin represents the views of the staff of the Office of Investor Education and Advocacy.  It is not a rule, regulation, or statement of the Securities and Exchange Commission (the “Commission”).  The Commission has neither approved nor disapproved its content.  This bulletin, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

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