What is 'Regulation A'

Regulation A is an exemption from registration requirements – instituted by the Securities Act – that apply to public offerings of securities that do not exceed $5 million in any one-year period. Companies utilizing the Regulation A exemption must still file offering statements with the Securities and Exchange Commission (SEC). However, the companies utilizing the exemption are given distinct advantages over companies that must fully register. The issuer of a Regulation A offering must give buyers documentation with the issue, similar to the prospectus of a registered offering.

BREAKING DOWN 'Regulation A'

Typically, the advantages offered by Regulation A offerings make up for the stringent documentation requirement. Among the advantages provided by the exemption are more 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.

What Investors Need to Know

Updates to Regulation A in 2015 allow companies to generate income under two different tiers. It is essential for investors interested in purchasing securities being sold by companies utilizing Regulation A to understand what tier the offering is being provided under. Every company is now required to indicate the tier its offering is conducted under on the front of its disclosure document, or offering circular. This is important because the two tiers represent two different types of investments. All offerings under Regulation A are subject to state and federal jurisdiction.

Tier 1

Under this tier, a company is permitted to offer a maximum of $20 million in any one-year period. Under this tier, the issuing company must also provide an offering circular, which must be filed with the Securities and Exchange Commission (SEC) and is subject to a vetting process by the commission and securities regulators in the individual states relevant to the offering.

Companies issuing offerings under tier 1 are not required to produce reports continually; they are only required to issue a report on the final status of the offering.

Tier 2

There are some significant differences for securities offered under this tier. Companies can offer up to $50 million in any one-year period. While an offering circular is required and is subject to review and vetting by the SEC, it does not have to be qualified by any state securities regulators. Also, companies offering securities under this tier must produce continual reports on the offering, including its final status.

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