Regulation A+ & the Intrastate Exemption
Funding can be one the most challenging parts of expanding your business because of the complex securities reporting requirements for securing private investors. The good news is that there are exemptions to these reporting requirements that specifically advantage small businesses making securities offerings! The two exemptions that we wanted to touch on in this blog article are the lesser known exemptions: (1) the intrastate exemption (or state crowdfunding tool) and (2) the federal exemption under Regulation A+.
The Intrastate Exemption is found in Section 3(a)(11) of the Securities Act and exempts offerings from registration that are offered and sold exclusively to residents of a single state. The business-seller of the offerings must also be a resident doing business in the same state. To authenticate that each purchaser is a resident, the business-seller obtains written representations or proof of residency (e.g. a current driver’s license, state income tax, utility bills, etc.). Importantly, there is no limit in the size of the offering or the number of offerees. Importantly, how you solicit your securities depends on the specific state law limitations. Even if the company cannot meet these it may still be eligible for the intrastate exemption on a case by case basis.
If the business-seller is able to meet the above criteria or otherwise invoke the intrastate exemption, then there are no federal reporting disclosure requirements. However, there is also no preemption of state law. This means that companies must comply with all applicable state regulations. Notably, exempted securities offered under two sections of the California Corporations Code (Sections 25102(h) and 25102(f)) have no specific disclosure requirements other than the requirement to file notice of share issuance with the Corporations Commission after the sale of the securities. In contrast, another section of the same California Corporations Code (Section 25102(n)) has substantial disclosure requirements except for excluded purchasers (e.g. institutional purchaser).
Regulation A+ is a federal regulation found in Section IV of the JOBS Act. The Securities Exchange Commission (SEC) released the final rules by the on March 25, 2015, with the effective date of June 19, 2015. The regulations surrounding Regulation A+ are a little more complicated than the Intrastate Exemption and require more filings with the SEC. However, the filing and amount of work associated with Regulation A+ is still substantially less than that normally required by the SEC.
What It Is? Regulation A+ exempts the registration requirements of the Securities Act of 1933 for securities-offerings up to $50 million annually. It does so by establishing two tiers of securities- offerings: (1) Tier I has an annual offering limit of $20 million, including no more than $6 million sold to affiliates of the business-seller, (2) Tier II has an annual offering limit of $50 million, including no more than $15 million sold to affiliates of the business-seller.
Who Can Take Advantage of Regulation A+? Any U.S. or Canadian business-seller can file for the Regulation A+ exemption. The business-seller must provide the SEC with all reports required under Regulation A+ before filing an official offering statement – this will depend on the individual-business model. Furthermore, the business-seller must not be disqualified as a “bad actor” and be in good standing with the SEC. Asset-backed securities are the only types of offerings that are excluded from Regulation A+. There are no limitations on the purchase amount by unaccredited investors in Tier I. Tier II buyers can be unaccredited but the offerings can be no more than 10% of the annual income of a natural person or annual revenue for a non-natural person.
“Testing the Waters”. Business-sellers are permitted to “test the waters” with or solicit interest to the general public, either before or after filing the offering statement. Business-sellers must provide the SEC with any solicitation materials used after publicly filing the official offering statement.
Filing Requirements: In contrast to the extensive initial filing requirements for other offerings, business-sellers only file an offering statement with the SEC on EDGAR. These statements must be qualified by the Commission before sales may be made pursuant to Regulation A+. Financial statements must also be included (different standards depending on the Tier). In addition to the initial filing, business-sellers must also comply with on-going reporting requirements.
Exchange Act Registration? Conditionally exempt from the requirement to register any class of equity securities held of record by more than 2,000 persons (or more than 500 persons who are not accredited investors), Tier II issuers will remain exempt as long as the issuer engages the services of registered transfer agent, remains subject to Tier II reporting obligations, is current in its annual and semiannual fiscal reports, and has a public float of less than $75 million.
State Law Preemption? Tier II preempts state securities blue sky laws. Tier I is still subject to state law regulations.
If you have any questions about exploring either of these avenues for funding, give us a call of (310)883-7923 or email us at firstname.lastname@example.org. To learn more about funding options, stay tuned for our future blog article on the newly passed Federal Crowdfunding Act and the implications it can have for funding your social enterprise or small business.