Tuesday, May 12, 2015

Which Should You Choose: Tier 1 or Tier 2 of Regulation A+?

                                                                                                                                            
By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out


or my eLearning course at  http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

 
Title IV of the JOBS Act directed the Securities and Exchange Commission to issue a new regulation A with higher offering limits and other provisions that make the new Regulation A more attractive to issuers.  The new Regulation A has been nicknamed Regulation A+. 

On March 25, 2015, the SEC issued final rules for Regulation A+ in Release No. 33-9741.

Summary of Primary Differences in Tier 1 and Tier 2 Regulation A+ Offerings

There are two types of Regulation A+ offerings: Tier 1 and Tier 2. If you want to do a Regulation A+ offering, should you choose Tier 1 or Tier 2?

  • Tier 1 offerings allow you to raise up to a maximum of $20 million during any rolling 12-month period from both accredited investors and non-accredited investors with no maximum limit on the amount any individual investor can purchase.  Of that $20 million maximum, up to $6 million can be re-sales by shareholders who are affiliates of the issuer during any 12 month period.  State registration laws are not pre-empted for offers or for sales.  Issuers do not have any post-offering requirements to file periodic reports with the SEC.

  • Tier 2 offerings allow you to raise up to a maximum of $50 million during any rolling 12-month period.  Of that $50 million maximum, re-sales by shareholders who are affiliates of the issuer are limited to $15 million during any 12-month period, except that for the first offering and all offerings during the first year, the offering price for affiliate re-sales cannot exceed 30% of the total offering price in the offering. State registration laws are pre-empted for offers and for sales. Non-accredited investors can invest in a Tier 2 offering, but only up to 10% of the greater of the investor's net worth or annual income, unless the securities will be registered on a national securities exchange.  Self-certification by the investor is permitted.  The issuer can accept the investor's representation about the amount the investor is allowed to invest in the offering, unless the issuer knows the representation is false.  Tier 2 issuers are required to file semi-annual reports with the SEC, until the issuer no longer has 300 record owners of shares.  But Tier 2 issuers who qualify as "smaller reporting companies" have an exemption from full 1934 Exchange Act reporting requirements even if they exceed Section 12 (g)'s registration triggers (2,000 record shareholders or more than 500 non-accredited investors).

Differences in Trading Markets for Tier 1 and Tier 2 of Regulation A+

Tier 2 rules facilitate trading on the Over-the-Counter Bulletin Board by allowing brokers to satisfy Rule 15c2-11 by relying on periodic reports Tier 2 issuers must file.  Tier 2 rules also encourage Tier 2 issuers to graduate to a national securities exchange by filing a Form 8-A, which is easier to use than a Form 10.

Trading in the shares of Tier 1 issuers is likely to be limited to trading on private platforms, because Tier 1 issuers are not required to file periodic reports with the SEC.  SecondMarket and SharePost are two examples of platforms that facilitate re-sales of securities of private companies.  These private trading platforms have focused on larger private companies.  But many platforms that sell securities in Regulation A+ offerings, Rule 506 (c) offerings and state crowdfunding offerings will be able to facilitate secondary market trading on their platforms.

The SEC has also indicated that it is considering permitting the creation of "venture exchanges" to facilitate secondary market trading, including for Regulation A+ issuers.  Such venture exchanges are likely to be modeled on the London AIM Exchange and the Canadian TSX Venture Exchange.  Future access to such venture exchanges could become an advantage for Regulation A+ issuers.

Interaction with Other SEC Re-Sale Provisions

Let's consider the rules that apply to re-sales of shares by three types of shareholders:

  • Investors who repurchase shares in the Regulation A+ offering who are not affiliates of the issuer before or after the purchase.
  • Affiliates of the issuer who own restricted securities or control securities.
  • Non-affiliate shareholders who did not purchase their shares in the Regulation A+ offering.
Investors purchase unrestricted securities in both Tier 1 offerings and Tier 2 offerings under Regulation A+.  Therefore, unless the investor is an affiliate of the issuer, the investors who purchase shares in the Regulation A+ offering can re-sell without complying with Rule 144.  Affiliates must comply with Rule 144 or another exemption when they re-sell even if they acquire unrestricted securities, because shares held be affiliates become "control securities."

Following both Tier 1 offerings and Tier 2 offerings under Regulation A+, the issuer is a private company that does not file full 1934 Exchange Act periodic reports.  Consequently, the private issuer provisions of Rule 144 apply to re-sales by shareholders who did not purchase shares in the offering.

Three things affect the ability of the issuer's shareholders to re-sell under Rule 144:

  • In Tier 2 officers, an issuer who files the annual and semi-annual periodic reports required by Tier 2 of Regulation A+ can facilitate shareholders re-selling shares by voluntarily filing two extra quarterly reports.  See Page 186 of SEC Release No. 33-9741.
  • Private companies (including Tier 1 and Tier 2 Regulation A+ issuers) can facilitate re-sales under Rule 144 by posting on their websites the information referred to in Rule 15c2-11(a)(5)(i) to (xiv) and (xvi).
  • The public information requirements of Rule 144 (c) always apply to shares owned by affiliates of the issuer, but non-affiliates who have held their restricted securities for more than one year can re-sell shares can under Rule 144 without current public information of the issuer being available.
That describes the legal pathway for shareholders to re-sell shares.  Whether an actual market develops for shares that shareholders want to resell depends on many factors.  However, as more investors register with platforms to purchase shares in primary offerings by issuers, one can expect the platforms will generate revenue by facilitating secondary market trading by both buyers and sellers.

Therefore, both Tier 1 and Tier 2 of Regulation A+ offer the opportunity to create some liquidity for shareholders before sale of the company or before becoming a full 1934 Exchange Act company.

Other articles about important Regulation A+ issues include the following:

 
Summary of Key Provisions of New Regulation A+
 
 
Is Title III Crowdfunding Already Obsolete? Regulation A+ = Supercharged Crowdfunding
 
 
Your Goals Will Determine Whether Regulation A+ Is Right for Your Business
 
 
Why Choose?  Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?
 
 
Microcap Financings: Regulation A+ Offerings Join Public Shell Company Mergers and Self-Registrations to Create Small Public Companies
 
 
State Securities Law Issues in Regulation A+ Offerings
 



 
 
 
 

If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at JFV@WardandSmith.com or  you can check out my newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=



 

 

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