Understanding Reg A+: A streamlined approach to going public

REG A+

2

Understanding Reg A+A new equity crowdfunding rule popularly known as Reg

A+ allows companies to raise up to $50 million a year from

individual and/or institutional investors without all of the

work and financial burdens of a public offering. Because

the concept is so new, there have been plenty of questions

and confusion around what a Reg A+ filing might entail.

The Securities and Exchange Commission (SEC) adopted

Reg A+ on March 25, 2015, and the rule went into effect on

June 19th. Already, a handful of EDGAR filings for Reg A+

issuers have been submitted. Reg A+ has been described

as a way of democratizing crowdfunding because earlier

crowdfunding opportunities were only open to wealthy or

“accredited” investors.

The Securities Act of 1933 requires all offerings of

securities to be registered with the SEC. However, many

have complained about the cost and laboriousness of

fulfilling qualifications for a public offering under these

rules. Under Title IV of the Jumpstart Our Business Startups

Act (JOBS Act) of 2012, Congress directed the SEC to

increase the offering limit under Regulation A tenfold—to

$50 million from $5 million. In addition, Reg A+ allows

issuers to solicit interest from investors before they make

any SEC filings whatsoever, in a “test the waters” provision

that many are applauding.

A Two-Tiered System Some experts believe that the greatest change to

Regulation A is the creation of two separate offering tiers,

each with its own requirements.

• Tier 1. This is for offerings of securities of up to $20

million in a 12-month period. Not more than $6 million

in offers can come from affiliates of the issuer (in other

words, from founders looking for greater liquidity). Other

than that, there is no limit to the amount an investor can

invest under a Tier 1 offering.

• Tier 2. This is for offerings of securities of up to $50 million

in a 12-month period. Here, affiliates of the issuer can

offer no more than $15 million. In addition, individual

investors who are not “accredited” will be limited to

investing up to 10 percent of whatever is greater: the

investor’s annual income or his or her net worth.

Experts have described the Tier 2 Regulation A+ offer as

a “mini-IPO.” In contrast to a traditional public offering,

however, companies can raise capital with less expensive

financial requirements in a shorter period of time than a

traditional S-1 registration requires. And under Reg A+,

Canadian companies and REITs may also participate.

Many believe that the creation of Reg A+ will allow small

and micro-cap companies to go public without the usual

burdens associated with doing so. Although the processes

are streamlined, raising money this way is not free of

regulatory rigmarole. In fact, the SEC’s Reg A+ rules total

453 pages.

Generally speaking, the same issuers are eligible to use

Reg A+ as were eligible to use Reg A, with one exception.

The disqualification provisions for Reg A+ are more

stringent. Issuers are excluded if they are considered

bad actors, and bad actors include issuers who have

been subject to an SEC order under Section 12(j) of the

Exchange Act within the past five years. Also excluded are

issuers required to file ongoing reports under Reg A who

have failed to do so.

How to File Under Reg A+To begin raising capital under Reg A+, an issuer would

file with the SEC an offering statement, which includes

an offering circular that in many ways resembles a

prospectus. This offering statement is submitted on Form

1-A. However, issuers have the option of filing the offering

circular as a confidential document by submitting a Form

DOS (Draft Offering Statement). Prior to the issuer publicly

filing its first Form 1-A, all prior DOS or DOS/A forms must

be disseminated on the SEC filing website or included as

Additional Exhibits to the Form 1-A.

Non-public correspondences can be submitted under

Form DOSLTR. When the issuer makes its first public

filing of the Form 1-A offering statement, any previously

submitted, non-public correspondences related to the

non-public review must be filed with the 1-A as Additional

Exhibits and will be disseminated publicly along with the

1-A. If there is confidential information in the DOSLTR,

the issuer must redact that confidential information from

the filed exhibit and include the required legends and

redaction markings.

For a Tier-1 offering, the SEC would review the issuer’s

materials, as would any state in which the issuer is

planning to offer the securities. This process is exactly

the same as what would happen under Reg A—only the

offering limits are higher.

Tier-2 offerings undergo a similar process to Tier-1

offerings except the review is solely by the SEC and not by

the states. In exchange for exempting review by the states,

the SEC requires issuers to provide audited financial state-

ments in a specified format and be subject to ongoing

reporting requirements. Some special rules apply to oil

and gas producers.

All Reg A+ issuers must produce financial statements,

including balance sheets, income statements, cash flow

records and any changes in stockholders’ equity, for the

two most recent fiscal years. For companies less than two

years old, these records must be produced from the date

in which the company was founded. All financial state-

ments by U.S. issuers must be prepared in accordance

with U.S. GAAP, while Canadian issuers may use interna-

tional accounting standards, such as IFRS.

Disclosure Requirements Issuers raising funds under Reg A+ can follow the

disclosure requirements for Form S-1 or they can follow

what is essentially a scaled-down version of the Form

S-1 requirements by using Form 1-A. Form 1-A does not

include some of the more burdensome disclosure require-

ments, such as the CD&A, internal controls over financial

reporting, and the quantitative and qualitative analysis

about market risk.

Form 1-A does, however, require an MD&A statement,

or “management’s discussion and analysis of financial

condition and results of operations.” The MD&A

requirement means that issuers will have to embark upon

a more detailed analysis of the company’s financial status

than they might have made under a private placement.

All Regulation A offering statements must be filed on

EDGAR. The SEC has amended Form 1-A to consist of

three parts:

• Part I, which is an XML-based form and will provide

basic issuer information;

• Part II, which is a text file that contains the disclosure

document and financial statements; and

• Part III, which is a text file containing exhibits and related

materials.

In addition, periodic reports and other required documents

associated with Reg A must be filed on EDGAR.

For More Information The SEC produced a comprehensive guide “Amendments

to Regulation A: A Small Entity Compliance Guide” that is

available at:

http://www.sec.gov/info/smallbus/secg/regulation-a-

amendments-secg.shtml.

To see how you can leverage Reg A+, contact your

RR Donnelley sales representative or visit our website at

financial.rrd.com.

For more information, contact your RR Donnelley sales representative or go to: financial.rrd.com Not legal advice

WP-REGA+ 03.2016Copyright © 2016 RR Donnelley® and RRD are trademarks of R.R. Donnelley & Sons Company. All rights reserved.

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