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Regulation A: Small Business Offerings

Filed in: Exam Content, Series 24, Series 65, Series 66, Series 7, Series 79

The Securities Act of ’33 requires securitiessmall-business-administration-loans sold in the U.S. must be registered with the SEC, with limited exceptions for certain types of securities (exempt securities) and certain types of transactions (e.g. Reg D, Reg S, Reg A, and more). Regulation A is a type of exempt transaction that allows issuers to raise limited amounts of capital (less than $5 million) by selling securities with reduced regulatory requirements and costs.

Regulation A offering is not a “private” offering, in fact, it is often referred to as a “mini-registration” because the securities can be sold to the public following the issuance. The criteria and characteristics of a Regulation A offering are outlined below:

Question

Answer

How much capital can be raised?Up to $5 million per 12 month period.Note: Of the total $5 million, $1.5 million can be sold by insiders, affiliates, or existing selling shareholders
What is the relevant time period to raise $5 million?Issuers can raise up to $5 million limit in any 12-month period.
What SEC filings are required before the issuance?Issuers must file Form 1-A with the SEC for review before selling the securities.What is Form 1-A?

Form 1-A operates like a mini-registration statement. It includes an offering circular (disclosure document) and exhibits (including unaudited financials).

What ongoing SEC filings are required
after the issuance?		Every 6 months, the issuer must file seven copies of Form 2-A with the SEC to report sales made under Regulation A.What about other ongoing disclosures?

Ongoing SEC disclosures, such as 10-k, 10-q, 8-k as required under the Securities Exchange Act of 1934, and SOX reporting is not required for issuers that raise capital via Regulation A.

What SEC filing is required at completion of the issuance?Issuer must submit a final Form 2-A within 30 calendar days after the termination, completion or final sale of securities in the offering.
Who cannot issue securities through
Regulation A?		Certain issuers are ineligible to use Regulation A:

  • SEC reporting companies (e.g. public companies)
  • Blank check companies
  • Investment companies (e.g. mutual funds, closed-end funds)
  • Issuers with a principal (officer, director, >10% shareholder) who is a convicted felon or other “bad actor” are disqualified from Regulation A. But, issuers with felons or bad actors may seek an SEC waiver
What disclosures must be made available to Reg A investors?Before the sale:A Preliminary or Final Offering Circular must be furnished to the prospective purchaser at least 48 hours prior to the mailing of the confirmation of sale.

With the trade confirmation:

A Final Offering Circular must be delivered to the purchaser with the confirmation of sale, unless it has been delivered to that person at an earlier time.

What type of advertising can a Regulation A issuer use to attract investors?Regulation A securities can be offered publicly, using general solicitation and advertising, including to retail and unaccredited investors.Can a Regulation A issuer test the water?

Companies may “test the waters” to determine market interest in their securities before filing Form 1-A with the SEC. For example, an issuer could publish or deliver a written document to prospective purchasers or make scripted radio or television broadcasts to determine whether there is an interest in their contemplated securities offering.

What limitations, if any, are there on the resale of securities purchase in a Regulation A offer?Investors do not receive “restricted securities,” meaning the securities can be freely resold to other investors, including to retail and unaccredited investors.
How does Regulation A integrate with state law registration (i.e. the Blue Sky laws)?Regulation A securities offerings must be registered at the state level (securities issued in a Reg A offering not Federal Covered). Because of this Regulation A offerings are uncommon in practice.

Knopman Notes
For test-takers it is important to understand and know the rules and regulations of the exempt transactions – even if they are not frequently used in practice. For Regulation A, one aspect to keep in mind is that the $5 million limit is determined by aggregating the issuer’s two most recent Form 2-A filings (filed every 6 months).

Relevant Exams
Series 7, Series 24, Series 65, Series 66, Series 79,

Written by Dave Meshkov

Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.

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