SEC Regulation A+ – A Primer & FAQ

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Reg A+ FAQ
Regulation A+ – A Primer
The following Q & A is intended to provide basic information about the new Regulation A+. Please bear in mind that this information is general in nature, and covers a highly technical area.  So it should be construed as legal or financial advice.
Who is Eligible to Use Regulation A+?
Any U.S. or Canadian company that has not been a publicly reporting public immediately prior to filing with the SEC is eligible to take advantage of Regulation A+.
How Much Can a Company Raise?
Any amount up to $50 Million in a 12-month period may be raised in Regulation A+ offerings. However, money raised in other types of offerings, such as private placements, are not included in this $50 Million 12-month cap.
How Long Does the SEC Registration Process Take?
Well, that depends – mainly on how good a job the company, its accountants and its attorneys did when preparing the SEC filing. You may expect to get comments from the SEC within 30 days of filing Form 1-A.  A company will respond to these comments through a combination of amending the Form 1-A and providing supplemental information.  A good guestimate is about 120 days from the first filing – this could be a bit –shorter – or a lot longer if not done right the first time.
How Much Will a Regulation A+ IPO Cost?
The two largest costs for a Regulation A+ offering will be a company’s SEC counsel and its auditors.  Expect to find a wide range of legal fees quoted by law firms – generally the bigger the firm – the bigger the bill. But if you do your homework you will be able to find experienced, qualified SEC lawyers who can get you to the finish line for $50,000 – $75,000.  Audit fees will vary, depending upon the size and complexity of the company. Expect a range between $25,000-$75,000, depending primarily upon the complexity of the financial statements.
There will be other expenses. If you enlist the aid of a professional broker-dealer, expect to pay a commission of around 7% of the proceeds, often with an equity kicker in the form of warrants to purchase the company’s stock.  Also plan on miscellaneous fees, such as filing fees with the SEC.
Do I Need to Register the Offering With the SEC?
Yes. You will need to file an Offering Statement and related information (Form 1-A) with the SEC, which will be reviewed by the SEC for compliance with SEC rules, similar to a traditional Registration Statement for an IPO.  The Regulation A+ securities may not be sold to the public until the SEC approves the Offering Statement. The Offering Statement includes the Offering Circular required to be provided to Investors.
All filings by a Regulation A+ company are done on the SEC’s electronic filings system, known as EDGAR. Unless a company seeks to initially file its initial Form 1-A “confidentially,” all filings will be immediately available to the public free of charge on its EDGAR filing system.
What Type of Non-Financial Information is Required in the Offering Statement?           
The prospectus type disclosure is contained in Part II of the Offering Statement, referred to in Regulation A+ parlance as the Offering Circular. The required information is similar to what would be included in a traditional IPO registration statement, but the level of detail is reduced to scale to smaller issuers.  This information includes such items as  risk factors, dilution, a description of the company’s business, the plan of distribution of the securities being sold, use of proceeds, management’s discussion and analysis of the presented financial information (MD&A), identification of directors and executive officers, management compensation information, ownership information, and related party transactions.
What Type of Financial Information is Included in the Offering Statement?
Audited Annual Financial Statements must be provided for the two fiscal years prior to the year of filing. Financial statements must be dated not more than nine months before the date of filing or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Financial statements must be prepared either in accordance with GAAP or PCAOB standards.
Who is Eligible to Audit the Financial Statements?
Unlike a fully reporting public company, a company’s independent auditor need not be registered with the federal Public Company Accounting Oversight Board (PCAOB).
Will the Company be Required to Register its Offering with any States?
No. A major feature of Regulation A+ is that companies that qualify their securities with the SEC are exempt from state “Blue Sky” laws. However, some states still may require notice filings, and states retain jurisdiction to enforce certain, including those requiring that offers and sales are not made through misrepresentations or omissions.
Can a Company Solicit Non-Binding Indications of Interest Before Preparing and Filing an Offering Statement with the SEC?
Yes. The SEC rules allow a company to “test the waters” to solicit interest in the proposed offering before any filings are made with the SEC. This is an important feature of Regulation A+, as it provides an opportunity to reduce the risk of an unsuccessful offering before incurring significant expenditures for attorneys and accountants.
Will the Company’s Offering Statement be Available to the Public as Soon as it is Submitted to the SEC?
The SEC’s rules allow a private company to submit its offering statement privately, so that it will not be visible to the public until a company determines to proceed with the offering.
Who Can Invest in a Regulation A+ Offering?
All investors, accredited and unaccredited, are eligible to purchase securities in a Regulation A+ offering. If a company lists on a national exchange such as Nasdaq immediately upon commencement of the offering, there are no limitations on how much may be invested in the offering. If a company chooses to list its shares on an over-the-counter market, such as OTC Markets, unaccredited investors will be limited to the greater of 10% of their income or net worth (exclusive of principal residence), whichever is greater. There are no investment limitations for accredited investors.  And there are no investment limitations on the amount of shares purchased after the offering in the secondary market.
Will the Shares Sold in a Regulation A+ Offering Be Freely Tradable?
Yes, unless the purchaser happens to be an “affiliate” of the Company. Being able to sell freely tradable shares is one of the major advantages of a Regulation A+ offering.  Typically, shares sold privately in an unregistered private placement are generally not freely tradable and often reflect a discounted price to the company reflecting this non-liquidity. And it is generally more difficult for a company to sell shares which are not immediately transferable, especially early stage companies where there is no secondary trading market.  So the ability of a company to sell freely tradable shares is one of the major benefits of Regulation A+ when compared to selling shares privately in an unregistered transaction.
Where Will Regulation A+ Shares Trade?
This will in most cases be determined by the company. The large majority of Regulation A+ companies will not initially meet NYSE or Nasdaq listing requirements. Typically a company’s shares will be eligible for listing on the OTC Markets, which has a three-tiered market structure. Other alternative markets, referred to as “venture exchanges,” are expected to develop in the coming months and years to accommodate smaller, early stage public companies.
Will the Company be Required to File any Reports with the SEC after its Offering Statement is approved?
Yes.  Regulation A+ requires companies to file periodic reports, though with less frequency and detail than a fully reporting company. A company must file an annual report (Form 1-K) with audited financial statements and a semi-annual report (Form 1-SA) with six months of unaudited financial statements. A company must also file reports for certain extraordinary events within four business days of their occurrence (Form 1-U).
If a Company Takes Advantage of Regulation A+, Can it Eventually Become a Fully Reporting Company and Move up to a National Exchange?
As long as a company meets the listing requirements of a national exchange, such as Nasdaq or the NYSE, a company can “uplist” at any time after its initial Regulation A+ offering by making an additional filing with the SEC to register as a fully reporting company.  National exchange rules require that a company become fully reporting under SEC rules as a condition of listing.  It is also possible for a company that meets exchange listing requirements to list simultaneously with the initial Regulation A+ offering.
When is a Regulation A+ Company Required to Become a Fully Reporting Company?
Generally, when any company has (1) more than 500 unaccredited shareholders of record, or 2,000 shareholders of record, and (2) at least $10 million in assets, it is required to file periodic reports with the SEC (e.g. Form 10-K’s and 10-Q’s). Note that this is calculated based upon record ownership of the shares, not beneficial ownership. If the shares are registered with a broker in “street name”, they are typically aggregated with other shareholders of that firm and will therefore be counted as a single beneficial owner.
The Regulation A+ rules provide that shares sold in a Regulation A+ offering will not be counted towards the maximum number of shareholders permitted before a company is required to become “fully reporting.”   And as one of the benefits of being a Regulation A+ company is lighter, less costly ongoing reporting than a fully reporting company, the SEC has carved out a further exception for companies who engage the services of a registered transfer agent and remain current with their Regulation A+ reporting obligations. A Regulation A+ company which exceeds the traditional reporting thresholds will nonetheless retain the ability to continue with the lighter reporting regimen so long as it has a “public float” (excluding the shares of affiliates) with a market value of less than $75 million or, in the absence of a public float, revenues of less than $50 million as of its most recently completed fiscal year.
A Regulation A+ company which triggers the full reporting thresholds still has a two year transitional period before it must begin to file as a fully reporting company.

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