Is a Regulation A Investment Offering right for you?
Regulation A allows investors to buy securities in smaller companies in earlier stages of development. These early –stage companies are able to offer and sell unregistered securities to the public, but with more limited disclosure requirements than what is required for publicly reporting companies.
Although Regulation A may provide a unique opportunity for you to invest in a start-up company, it will also involve quite a bit of risk.
Investments in startups and early-stage companies are speculative and it is possible the businesses will fail. A start-up often relies on the development of a new business, product or service that may not find a market, unlike an investment in a mature business where there is a track record of revenue and income.
There is also the risky of illiquidity. You may have to hold your investment for an indefinite period of time, even if there is no resale restriction. Since the securities are not listed on an exchange, it may be difficult to find a buyer when you are ready to sell your investment.
Requirements to invest in Regulation A offerings
The early stage company that you are considering investing in should provide you with an offering circular that will help you make your investment decision.
The offering circular will contain information about the offering and the securities offered, risks of the investment, use of proceeds, any selling shareholders, the company’s business, management, performance, plans and financial statements. There may be additional materials that you receive in addition to the offering circular.
Regulation A – Tier 1 or Tier 2
Companies are required by law to indicate on the cover of the offering circular which tier they are offering.
Tier 1:
A company can raise up to $20 million in any 12-month period under a Tier 1 offering. According to the SEC, Tier 1 offerings must be filed with the regulator, and are subject to review and qualification by SEC staff and state securities regulators where the offering is being conducted.
The financial statements disclosed in a Tier 1 offering do not have to be audited. There are no limitations on whether you can invest, or how much you can invest, if you are investing in a Tier 1 offering.
Tier 2:
A company can offer up to $50 million in any 12-month period under a Tier 2 offering. According to the SEC, Tier 2 offerings must be filed with the regulator, and are subject to review and qualification by SEC staff but are not subject to review by state securities regulators.
Financial statements disclosed in a Tier 2 offering must be audited by an independent accountant.
Tier 2 securities may be listed on a national exchange if the company applies for listing and meets the listing requirements for that particular exchange. At that point, the company would be required to comply with the more extensive ongoing reporting requirements of public companies.
There are investment limitations for Tier 2 offerings if you are not an accredited investor and the securities aren’t going to be listed on a national securities exchange.
In this case, individual investors are limited to investing no more than 10% of the greater of the person’s annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence.)
Company Disclosures – Getting information on your investment
Although companies must disclose information with the SEC, the type and frequency is not the same as publicly traded companies
Tier 1 offerings do not have ongoing reporting obligations other than a final report on the status of the offering. However, Tier 2 offerings are required to file semi-annual, annual and current reports as well as the offering statement and the exit report.
Of course, if the company is listed on a stock exchange, than they will already meet their Regulation A requirements through public reporting obligations.
It is important for you to obtain all the information that you need to make an informed investment decision.
Keep in mind when investing in Regulation A offerings, a company can only accept payment for the sale of its securities once its offering materials have been qualified by the SEC staff. This makes it important to know whether an offering has been qualified. According to the regulator, just because the SEC qualifies an offering statement, does not mean that the SEC has assessed or approved the accuracy of the offering statement or the merits of the securities offered.
It’s possible that fraudsters could try to use these qualifications as formal approvals in order to mislead investors.
Regulation A investments may be pitched as a unique opportunity being offered to only a handful of investors, including you. Even if the deal is “unique,” it may not be a good investment.
Unlike registered offerings in which certain information is required to be disclosed, investors in Regulation A offerings are generally on their own in obtaining the information they need to make an informed investment decision. Investors need to fully understand what they are investing in and fully appreciate what risks are involved.
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This information is being provided by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington.
