Regulation A Offerings – Blue Sky Requirements

Regulation A, also known as Regulation A +, provides an exemption from registration for sales of up to $50 million in a 12 month period. The exemption provided by Regulation A + offers numerous benefits to issuers seeking to go public or remain private. Regulation A+ provides issuers with two choices for their offerings. Tier 1 provides an exemption for an offering of up to $20 million in a 12-month period and  Tier 2 provides an exemption for an offering of up to $50 million in a 12-month period. One aspect of Regulation A that should be considered is the impact of state blue sky laws on the offering as well as resales.

Regulation Tier 1 v Tier 2 – Regulation A State Blue Sky Compliance

The trading of securities of issuers listed on National Securities Exchanges like the NASDAQ Stock Market and the New York Stock Exchange (“NYSE”) are exempt from State blue sky laws that govern secondary trading. Unlike exchange listed issuers, companies on the OTC Markets must comply with state blue sky laws for both their Regulation A+ offering and subsequent resales by the purchasers in the offering. Securities offered under Regulation A+ Tier 2 are “covered securities” under the National Securities Markets Improvement Act of 1996  (“NSMIA”) and are exempt from state registration and qualification requirements. In Regulation A Tier 2 A offerings, individual states may only require the issuer to provide a copy of the Form D filed with the Securities and Exchange Commission and pay filing fees.

Issuers conducting Regulation A + Tier 1 offerings must comply with the specific rules and regulations of each state where the Company plans to offer and sell securities. Companies may use the North American Securities Administrators Association (“NASAA”)  review program for Regulation A+ Tier 1 offerings. Under the NASAA coordinated review program, Tier 1 issuers may email their Regulation A offering materials to the administrator of the review program. Upon approval, the Tier 1 offering will be compliant with the state blue sky laws in the states that participate in the program.

Manual Exemption for Resales

Currently, 38 states recognize the Manual Exemption for secondary trading of securities sold in Regulation A+ Offerings. To avail oneself to the exemption, the issuer and the security must be listed in a securities manual recognized by the specific state. The securities manual must include: the names of the issuer and its officers and directors, the issuer’s balance sheet; and a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations.

Unsolicited Brokerage Transactions

Purchasers in Regulation A+ Offerings may also rely on the exemption for unsolicited brokerage transactions which exempts a non-issuer transaction by or through a broker-dealer effecting an unsolicited order or offer to purchase a security.  The Unsolicited Brokerage Transaction exemption is not available for an unsolicited transaction by or through the issuer directly.

Issuers conducting Regulation A Offerings should consider the following factors impacting liquidity and resales:

• Secondary sales in Tier 1 Regulation A Offerings are limited to $6 million in a 1 month period.
• Secondary sales in a Tier 2 Regulation A Offering, at the time of the Regulation A offering and 12 months thereafter cannot exceed 30 percent of the aggregate offering price of the offering.
• The shares sold in a Regulation A + Offering are freely tradable by non-affiliates upon qualification by the SEC.
• The issuer’s sponsoring market maker may immediately file a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) to initiate quotation of the issuer’s shares upon qualification by the SEC of the Regulation A+ offering.
• OTC MarketsOTCQX and OTCQB eligibility are dependent on the Form 211
• Upon clearance of the Form 211by FINRA, the sponsoring market maker will quote the issuer’s shares for first 30 days.
• State blue sky laws relating to secondary trading are applicable to secondary trading of securities sold in Regulation A Offerings & issuers should ensure an exemption is available.

Regulation A+ is offers benefits to both SEC reporting and non-reporting companies:

• Issuers using Regulation A+ may engage in solicitation to sell their offering to both accredited and non-accredited investors.
• In a Regulation A+ offering, companies may file a simplified offering statement on Form 1-A instead of a full-length registration statement.
• Issuers conducting Regulation A+ Offerings are subject to scaled down SEC disclosure obligations.
• State Blue Sky laws preempt securities offerings conducted under Tier 2 of Regulation A+.
• Regulation A is available for a direct public offering, an initial public offerings as well as a Going Public Transaction.
• Regulation A+ simplifies the process of obtaining the stockholders required by the Financial Industry Regulatory Authority while allowing the issuer to raise initial capital.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the Frankfurt Stock Exchange, London Stock Exchange, NASDAQ Stock Market, the NYSE MKT and OTC Markets. The firm’s services include SEC reporting requirements, corporate law matters, securities law and going public matters.