Reg A Tier 1 Merit Review vs Disclosure Review

Regulation A has become an important capital-raising pathway for early-stage and growth companies that want to raise funds from the public without completing a full IPO. However, companies considering a Reg A Tier 1 offering quickly discover that the regulatory process can vary significantly depending on where investors are located.

Unlike Tier 2 offerings, Tier 1 offerings are not federally preempted from state securities regulation. This means issuers must comply not only with the U.S. Securities and Exchange Commission but also with individual state Blue Sky regulators. Each state retains the authority to review the offering before securities can be sold to investors in that jurisdiction.

One of the most important differences between states is the type of review they apply to securities offerings. Some states evaluate offerings through a merit-review framework, while others rely primarily on a disclosure-review approach. Understanding the difference between these two regulatory philosophies can help issuers anticipate review timelines, documentation requests, and potential revisions to their offering structure.

What Is a Regulation A Tier 1 Offering?

Regulation A was modernized under the JOBS Act to create a streamlined pathway for companies to raise capital from the public. The regulation is divided into two tiers, each with different limits and regulatory requirements.

A Tier 1 offering allows companies to raise up to $20 million within a 12-month period. The issuer must file an offering statement with the SEC using Form 1-A, which contains information about the company’s business, management, financial condition, and the terms of the securities being offered.

Once the SEC qualifies the Form 1-A offering statement, the company may begin selling securities to investors. However, unlike Tier 2 offerings, Tier 1 offerings must still comply with full registration requirements in every state where the securities will be offered or sold.

This additional layer of oversight means issuers often interact with multiple state regulators during the review process.

Why State Regulators Review Tier 1 Offerings

State securities laws, commonly referred to as Blue Sky laws, were originally designed to protect investors from fraudulent or overly speculative investments. While federal securities law establishes nationwide disclosure standards, states retain the authority to enforce their own rules for certain types of offerings.

For Reg A Tier 1 offerings, state regulators may review the offering documents before allowing the sale of securities within their jurisdiction. Their role typically includes examining the offering statement, verifying that disclosures are adequate, and ensuring that the offering complies with state-specific requirements.

However, the way regulators approach this review can differ depending on the regulatory model they follow. Broadly speaking, state oversight falls into two conceptual frameworks:

• Merit review: Regulators evaluate the fairness and structure of the offering
• Disclosure review: Regulators focus primarily on whether investors receive sufficient information

These two approaches reflect different philosophies about the role regulators should play in protecting investors.

What Is Merit Review in Securities Regulation?

Merit review is a regulatory approach in which the authority reviewing a securities offering evaluates not only the completeness of the disclosure but also the underlying fairness of the transaction itself.

Under this framework, regulators may examine whether the terms of the offering are reasonable and equitable for investors. This can include reviewing factors such as the pricing of securities, the compensation paid to promoters or insiders, and the offering’s overall financial structure.

In other words, regulators applying merit review are not simply checking whether information is disclosed. They are also considering whether the investment opportunity itself appears fair from an investor protection perspective.

In many merit review states, regulators may analyze elements such as:

• whether the offering price appears reasonable
• whether insiders are receiving excessive compensation
• whether the capital structure creates unfair dilution for investors
• whether the company’s financial condition supports the proposed offering

If regulators determine that an offering contains problematic features, they may require the issuer to revise the terms before granting approval.

The key idea behind merit review is that regulators actively evaluate the fairness of the investment opportunity itself.

How Merit Review Applies to Reg A Tier 1 Offerings

For companies pursuing a Reg A Tier 1 offering, merit review can influence both the timeline and the structure of the capital raise.

When a state applies merit review standards, regulators may examine several aspects of the offering statement beyond simple disclosure. They may assess whether the terms of the securities offering are consistent with investor protection principles and whether the offering’s structure could expose investors to unnecessary risk.

For example, regulators may review:

• the amount of compensation paid to promoters, founders, or brokers
• whether insiders are receiving preferred terms compared to public investors
• the dilution that new investors may experience
• whether the offering price appears justified relative to the company’s financial condition

In some cases, regulators may request revisions before approving the offering in their state. These requests could include modifying compensation arrangements, clarifying the use of proceeds, or adjusting elements of the offering structure.

This process can create additional review steps for issuers conducting multi-state Tier 1 offerings, especially when different states apply slightly different merit standards.

What Is Disclosure Review in Securities Regulation?

Disclosure review represents a different regulatory philosophy. Instead of evaluating whether an investment is appropriate or fair, regulators focus on ensuring that investors receive complete, accurate, and transparent information about the offering.

Under a disclosure-based approach, the responsibility for evaluating the investment rests primarily with the investor rather than the regulator. The regulator’s role is to verify that the offering documents provide sufficient information for investors to make an informed decision.

This framework is based on the idea that well-informed investors can assess risks and decide whether an opportunity aligns with their investment goals.

Regulators conducting disclosure review typically focus on questions such as:

• Does the offering statement include all required information?
• Are risk factors clearly explained?
• Are financial statements accurate and properly presented?
• Are the terms of the securities clearly described?

The core principle of disclosure review is transparency rather than judgment of the investment’s quality.

How Disclosure Review Applies to Reg A Tier 1 Filings

In states that follow a disclosure-oriented approach, regulators reviewing a Reg A Tier 1 offering typically concentrate on the completeness and clarity of the Form 1-A filing.

Their goal is not to determine whether the offering represents a good investment. Instead, they aim to ensure that the issuer provides sufficient information for investors to evaluate the opportunity independently.

Regulators may review:

• the business description and management discussion
• financial statements included in the offering statement
• the description of securities and investor rights
• the risk factor section
• the intended use of proceeds

If disclosure appears incomplete or potentially misleading, regulators may request revisions or additional clarification. Once the disclosure meets the required standards, the offering may proceed without further evaluation of its underlying investment merits.

This approach places greater emphasis on transparency and investor responsibility.

Key Differences Between Merit Review and Disclosure Review

Although both regulatory models aim to protect investors, they operate in fundamentally different ways. Understanding these differences can help issuers anticipate how state regulators may approach their offering.

Both approaches ultimately seek to protect investors, but they do so through different mechanisms.

Which States Use Merit Review vs Disclosure Review

The U.S. securities regulatory system includes a mixture of both approaches. Some states have historically adopted merit-review frameworks, while others rely more heavily on disclosure-based principles.

For issuers planning a Reg A Tier 1 offering across multiple jurisdictions, this means the review process may vary by state. A company may encounter different types of feedback from regulators depending on how each state approaches securities regulation.

Because Tier 1 offerings do not benefit from federal Blue Sky preemption, with only notice filings like in Tier 2 offerings, issuers must often coordinate filings and communications with several state regulators simultaneously.

Practical Implications for Reg A Tier 1 Issuers

The presence of state review requirements can have practical consequences for companies planning a Tier 1 offering.

First, review timelines may vary depending on the states involved and the complexity of the offering. Merit review states may require additional discussion about offering structure, which can extend the review process.

Second, issuers may need to respond to regulator comments requesting clarification or revisions to their offering documents. These comments can involve disclosure updates or structural considerations, depending on the state’s review model.

Third, multi-state offerings require careful coordination to ensure that filings, responses, and approvals remain aligned across jurisdictions.

For these reasons, companies preparing a Reg A Tier 1 offering often work with experienced securities counsel and filing professionals to manage the regulatory process efficiently.

Why Many Issuers Choose Reg A Tier 2 Instead

While Tier 1 offerings can be attractive for smaller capital raises, many issuers ultimately choose Tier 2 because of its federal preemption benefits.

Reg A Tier 2 offerings allow companies to raise up to $75 million within a 12-month period. More importantly, Tier 2 offerings are generally exempt from state merit review and registration requirements under federal law, but require only notice filings and state fees.

This means issuers do not need to obtain approval from individual state regulators before selling securities nationwide. Instead, they focus primarily on the SEC qualification process.

As a result, Tier 2 offerings often provide a more streamlined path for companies seeking to raise capital from investors across multiple states.

Understanding State Review Helps Issuers Prepare for Tier 1 Offerings

Reg A Tier 1 remains an important capital-raising option, particularly for companies targeting smaller offerings or investors in a limited number of states. However, the continued role of state securities regulators means issuers must understand how different review frameworks affect the offering process.

Merit review and disclosure review represent two distinct approaches to investor protection. One emphasizes evaluating the fairness of the investment itself, while the other focuses on ensuring transparency so investors can make their own decisions.

For companies planning a Reg A Tier 1 offering, understanding these regulatory models can help anticipate state review expectations and reduce delays during the qualification process.  Get started with Reg A blue sky filings today.