Regulation A was created under Section 3(b) of the Securities Act of 1933 (the “Securities Act”) to exempt public offerings not exceeding $5 million in any 12-month period by non-reporting companies, without restrictions on the types of investors that can take part in the offering. By: Brenda Lee Hamilton, Attorney Hamilton & Associates Law Group
As with registered offerings, the securities can be offered publicly and are eligible to trade freely, immediately after the offering. To rely upon Regulation A, an Issuer must file an offering statement (called a “Form 1-A”) with the Securities and Exchange Commission (“SEC”). The key benefits of Regulation A offerings are:
• Although the financial statements in the Form 1-A must comply with US Generally Accepted Accounting Principles (commonly referred to as “GAAP), they are not required to be;
• There are no Exchange Act reporting obligations to the SEC after the offering;
• Companies may choose among three formats to prepare the Form 1-A, one of which is a simplified question and answer document;
• Sales can be made to “unaccredited investors” so the Issuer has a larger pool of investors;
• This exemption offers a less expensive alternative to registration, especially with respect to illegal, printing, underwriting and accounting fees; and
• The valuable “test the waters” provision which allows the issuer to determine if there is interest in its offering.
The Form 1-A requires disclosure of risk factors, use of proceeds, officer and director back ground informatory, corporate history, company history, marketing plans as well as a description of products and/or services.
The National Securities Markets Improvement Act of 1996 did not preempt from state regulation offerings made under Regulation A which means that the issuer must either find an exemption or register in the states where the securities are being offered. The exemptions under state blue-sky laws are not particularly helpful to small issuers relying upon Regulation A. The state limited offering exemptions limit the number of offerees, undercutting the ability to publicly offer securities.. Small businesses may choose to register with each state by qualification or, for offerings of up to $1 million, on the simpler SCOR (Small Corporate Offering Registration) form. A few states allow registration by coordination with a Regulation A offering and allow the issuer to file the Form 1-A.
Regulation A exemption is not available to all issuers and imposes the following limitations:
• Only those entities that are organized and have a principal place of business in the United States or Canada may rely upon Regulation A;
• The issuer not be subject to the 1934 Act’s periodic reporting requirements immediately before making the offering;
• The exemption also requires that issuers have a specific business plan in place; development stage companies, such as blank check companies, cannot use it; and
• Regulation A is not available to issuers that have been subject to SEC related proceedings in the past.
Insignificant deviations from the Regulation A requirements will not disqualify the offering from the exemption if (i) the failure to comply did not pertain to a requirement intended to protect the particular individual; (ii) the failure was insignificant in relation to the offering as a whole, and (iii) a good faith and reasonable attempt was made to comply with the requirements.
ABOUT THE AUTHOR: Brenda Lee Hamilton, P.A.
Ms. Hamilton counsels clients in stock exchange listings involving the New York Stock Exchange, American Stock Exchange, NASDAQ and the OTC Markets. She also assists clients with obtaining dual and single listings on international exchanges such as the Frankfurt, TSX Venture Exchange , Toronto and London exchanges including compliance with regulatory requirements of the various Securities Commissions, including corporate governance matters, liaising with the various Securities Commissions, continuous disclosure and other filing requirements with the various Securities Commissions, prospectus preparation and filings (IPO and non-IPO),
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.