Raising capital can be a complex process, but Regulation A compliance provides companies with an efficient way to secure funding without the burdens of a full SEC registration. This exemption, often called a “mini-IPO,” allows small and midsized businesses to raise capital while benefiting from reduced regulatory requirements. Within Regulation A offerings, there are two tiers—Tier 1 and Tier 2—each with its own set of rules and compliance obligations.
Compliance is critical for companies considering a Tier 2 securities offering. Understanding these regulations, from Form 1-A filing requirements to ongoing SEC reporting obligations, ensures that issuers avoid SEC penalties and remain in good standing with investors. Below, we break down the compliance essentials of Regulation A and Tier 2 offerings, focusing on federal and state-level requirements, investor protections, and best practices for staying compliant.
What is Regulation A?
Regulation A is a securities exemption under the Securities Act of 1933, designed to help companies raise capital while avoiding the complexities of a traditional IPO. In 2015, the SEC expanded Regulation A under the JOBS Act, increasing the amount that could be raised and introducing two tiers of securities offerings:
- Tier 1 allows issuers to raise up to $20 million in 12 months. Companies must comply with SEC and state-level registration requirements, including Blue Sky Laws, in every state where they sell securities. Financial statements do not need to be audited.
- Tier 2 allows issuers to raise up to $75 million in 12 months. Unlike Tier 1, state-level registration is preempted under federal law, simplifying the process. However, audited financial statements and ongoing SEC reporting are required.
For most mid-sized companies seeking to raise larger amounts of capital, Tier 2 is the preferred choice due to its federal preemption of Blue Sky Laws and greater fundraising flexibility.
Issuer Eligibility and Requirements
While Regulation A offers flexibility, not every company is eligible to use this exemption. Understanding issuer eligibility is essential for both domestic and foreign companies looking to raise capital under Tier 1 or Tier 2.
Domestic Issuer Requirements
- Must be organized and have their principal place of business in the United States or Canada.
- Companies can include early-stage startups, growth companies, and even established businesses seeking expansion capital.
- Must not be a company with an SEC reporting obligation under the Securities Exchange Act of 1934, though some voluntary filers may still qualify.
- Cannot be a blank-check company, an investment company registered under the Investment Company Act of 1940, or a company disqualified under the “bad actor” provisions of Regulation A.
Foreign Issuer Requirements
- Foreign companies are not eligible to use Regulation A unless they are organized under the laws of the United States or Canada and have their principal place of business in one of these countries.
- A foreign company with substantial operations in the U.S. or Canada may be eligible if it creates a domestic entity specifically to issue securities under Regulation A.
- Must comply with the same ongoing reporting requirements as domestic companies, including annual and semi-annual filings with the SEC.
Additional Considerations for Issuers
- Issuers must ensure that they are not engaging in fraudulent or misleading activities, as the SEC actively monitors Regulation A offerings for compliance.
- Companies raising capital through Tier 2 offerings must maintain clear financial records and ensure audited financial statements are prepared following U.S. GAAP (Generally Accepted Accounting Principles).
- For companies seeking international investment while remaining Regulation A-compliant, forming a U.S.-based entity with a legitimate operational presence is a common and practical solution.
By understanding these eligibility requirements, both domestic and foreign companies can make informed decisions about leveraging Regulation A to achieve their fundraising goals while staying fully compliant with SEC regulations.
Understanding Form 1-A: The Offering Statement
Before launching a Regulation A offering, issuers must submit Form 1-A to the SEC. This document serves as the official offering statement and provides key details about the company and the securities being offered.
Breakdown of Form 1-A
Form 1-A consists of three main parts:
1. Part I: Notification
- Includes general company details, the type of securities being issued, and information on previous SEC filings.
- Companies must specify whether they are conducting a Tier 1 or Tier 2 offering.
2. Part II: Offering Circular
- Functions as the prospectus, detailing financial statements, risk factors, management structure, and business operations.
- Tier 2 issuers must include two years of audited financial statements.
- Must be written in plain language to ensure accessibility for investors.
3. Part III: Exhibitions
- All supporting documents include legal opinions, underwriting agreements, and marketing materials.
The SEC must qualify Form 1-A before any sales can begin. This process typically takes 60-90 days, depending on the complexity of the filing and the SEC’s review process.
Ongoing Filing and Compliance Requirements for Tier 2 Offerings
Once an offering is approved, Tier 2 issuers must adhere to ongoing reporting obligations to maintain compliance. These include:
1. Annual Reports (Form 1-K):
- Due within 120 days after the end of the fiscal year.
- Must include audited financial statements, management discussion & analysis, and an operational summary.
2. Semi-Annual Reports (Form 1-SA):
- Due within 90 days after the end of the semi-annual period.
- Provides unaudited financial statements and business updates.
3. Current Reports (Form 1-U):
- Must be filed within four business days of any major corporate event (e.g., mergers, CEO changes, or major acquisitions).
4. Audited Financial Statements:
- An independent PCAOB-registered accounting firm must audit financial statements.
- This ensures compliance with SEC reporting standards and investor protection.
Investor Protections and Restrictions
Tier 2 offerings allow companies to raise larger amounts of capital, but they also impose investor protection rules to ensure financial stability and reduce risk.
- Investment Limits:
- Non-accredited investors may only invest up to 10% of their annual income or net worth.
- Accredited investors face no investment limits.
- Secondary Trading of Securities:
- After a Tier 2 offering, securities are freely tradeable and may be listed on OTC or national exchanges.
- Issuers must comply with additional exchange listing requirements if applicable.
- Anti-Fraud Regulations:
- Companies must comply with anti-fraud provisions under Section 17 of the Securities Act, which prohibits misleading statements or material omissions in filings.
Regulation A, Tier 2 and Blue Sky Laws
One major advantage of Tier 2 offerings is that state registration (Blue Sky Laws) is preempted. This means issuers do not have to register with each state, significantly reducing administrative burdens.
However, more than 40 states still require notice filings and charge fees for securities sold within their jurisdiction. Common state-level requirements include:
- Filing a copy of Form 1-A with the state regulator.
- Paying a notice filing fee, which varies by state.
- Submitting consent to service of process.
- Filing annual renewal notices and amendments when necessary.
Issuer Dealer Requirements
In some states, issuers conducting Tier 2 offerings are required to register as issuer-dealers if they plan to sell securities directly to investors without using a broker-dealer. Key issuer-dealer compliance obligations include:
- Registering with state securities regulators where required.
- Paying applicable licensing fees and renewal costs.
- Ensuring officers or directors engaging in sales efforts register as agents in certain states.
- Renewing such issuer dealer and sales agent licenses on an annual basis.
Blue Sky Fees and Ongoing Filing Costs
While Tier 2 offerings are exempt from full state securities registration, issuers must still budget for state-level fees associated with notice filings and renewals. Common Blue Sky compliance costs include:
- Initial state notice filing fees range from $200 to $2,500 for each state, depending on the jurisdiction.
- Annual renewal fees, which vary by state are often less and not required in every state.
- Issuer-dealer licensing fees in certain states, if selling directly to investors.
- Late filing penalties can significantly increase compliance costs if deadlines are missed.
To view the fee list, visit here.
SEC Enforcement and Penalties for Noncompliance
Failure to comply with Regulation A, Tier 2 requirements can result in SEC enforcement actions. Common penalties include:
- Failure to File Form 1-A or Ongoing Reports:
- This can result in civil penalties or restrictions on future offerings.
- Misleading Statements in Offering Circulars:
- Companies found guilty of material misstatements may face SEC investigations and investor lawsuits.
Conclusion: Staying Compliant with Blue Sky Compliance
With the SEC actively enforcing filing requirements, issuers must prioritize accurate reporting, audited financials, and investor protections.
Blue Sky Compliance helps issuers manage all aspects of Tier 2 compliance, ensuring they meet both SEC and state-level obligations. Contact Blue Sky Compliance today to ensure a smooth, fully compliant capital-raising process.
