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Regulation A+ and Tiers I and II

As of March 25, 2015, the Securities and Exchange Commission (“SEC”) adopted new rules to update and expand Regulation A. Regulation A+ will allow companies to gain access to funds through crowdfunding. These new rules are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.

What will the new rules do?

The update and expansion of Regulation A to Regulation A+ will allow smaller companies to sell up to $50 million of securities in a 12-month period.  These exemptions, however, are subject to eligibility, disclosure, and reporting requirements. The new rules have created a more effective way to raise capital while attracting and protecting investors. Non-accredited investors will be allowed to annually invest up to ten percent of their income or net worth, depending on which amount is greater. Before the new rules came out, only accredited investors were able to invest in startups through equity crowdfunding. The final rules are referred to as Regulation A+ and are provided in two tiers of offerings based on amount of security offerings over a 12-month period. Both are subject to the same basic requirements and eligibility limits, but differ in registration and qualification offerings.

What are the main differences between the Tier 1 and Tier 2?

Under Title IV of the JOBS Act, the offerings are as follows: Tier 1 consists of security offerings of up to $20 million over a 12-month period, with no more than $6 million of these offers coming from selling security holders that are affiliates of the issuer. Tier 2 consists of securities up to $50 million in a 12-month period, with no more than $15 million of these offers coming from selling security holders that are affiliates of the issuer. Up until $20 million of offerings, the issuer can choose to proceed under Tier 1 or Tier 2. These include, but are not limited to, review by SEC’s staff, permits, and eligibility limits. The companies that conduct their offerings under Tier 2 are subject to additional requirements. These requirements are to provide audited financial statements, file annual, semi-annual, and current event reports, and the placement of limitations on the amount of securities that non-accredited investors can purchase under this tier. In addition, within 5 years of the adoption of Regulation A+, there must be a report submitted to the SEC regarding impact of both Tiers on capital formation and investor protection.

How does the offering process work?

Issuers are required to file an offering statement on Form 1-A with the SEC using the EDGAR System. Form 1-A consists of Part I—Notification, Part II—Offering Circular, and Part III—Exhibits. Issuers can submit offering statements to be reviewed by the staff of the Division of Corporation Finance before filing any documents. This non-public submission must take place no later than 21 days before the qualification. In addition, both Tier 1 and Tier 2 issuers are required to file balance sheets and other financial statements from recent fiscal years. These statements must be in accordance with the Generally Accepted Accounting Procedures (GAAP).

At our law firm, we assist clients in legal issues related to crowdfunding, Regulation A+, and Tier I and Tier II offerings.  You may contact us in order to setup an initial consultation.