1992, as part of its Small Business Initiative, the SEC adopted significant amendments to Regulation A.22
These
amendments imposed requirements for the offering circular, which had the effect of creating more similarities between an offering circular and a prospectus used in a registered offering. An offering circular is generally less detailed, however. Rule 253(a) provides that an offering circular must include the narrative and financial information required by Form 1-A.23
Rule 252(a) also
requires that “any other material information necessary to make the required statements, in the light of the circumstances under which they are made, not misleading” be included. Part II of Form 1-A sets forth the specific information
required to be disclosed and provides two formats for the offering circular: all corporate issuers may use Model A of Part II of Form 1-A and disclose the information required by the form; and all other issuers, and any issuer that so chooses (including corporate issuers), may use either Part I of Form S-1, except for the financial statements required by Form S-1, or Model B of Part II of Form 1-A.24 Depending on the type of issuer, the required disclosure content must follow either Model A, which follows a question-and-answer format, or Model B, which is generally similar to an S-form registration statement, or Part I of Form S-1. Financial statements for the preceding two fiscal years must be filed as part of the offering statement and included in the offering circular under both models.25
for other purposes, the financial statements to be filed under Regulation A need not be audited.26
Unless an issuer has prepared audited financials The financial
statements must be prepared in accordance with generally accepted accounting principles (GAAP) in the United States. Regulation A filings are not currently made via the SEC’s electronic filing system (known as EDGAR).
Liability An exempt offering pursuant to Regulation A is excluded from the operation of section11 of the Securities Act. Regulation A offerings are, however, subject to the antifraud provisions under the federal securities laws.
Offering communications An issuer engaged in a Regulation A offering has substantial flexibility regarding offering communications. This is especially true if one compares the types of communications permitted under Regulation A with the limitations on issuer communications in connection with most private placements. No sale of securities can be completed without the use of an offering circular; however, an issuer may solicit retail investors, including investors
that are not accredited investors. In addition, an issuer may test the waters before preparing and filing offering materials. This is an important advantage associated with a Regulation A offering. In the pre-filing period, before the issuer files an offering statement, Rule 254(a) allows an issuer to publish or deliver to prospective purchasers a written document or to make scripted radio or television broadcasts to determine whether there is interest in a contemplated securities offering.27
An issuer must comply
with specified requirements in connection with any test- the-waters communications, including the use of certain disclaimers on any offering materials used for this purpose.
Character of the securities sold in a Regulation A offering The securities sold in a Regulation A offering are not considered “restricted securities” under the Securities Act. As a result, the securities are not subject to any transfer restrictions and may be offered and sold to retail investors. This is important to an issuer that would like an active trading market to develop for its securities following completion of a Regulation A offering. However, the issuer’s securities may not be listed or quoted on a securities exchange, and, as a result, there may not be a liquid market for the securities. The securities are not considered “covered securities” for blue sky purposes, as discussed below.
Reporting requirements As discussed above, the Regulation A exemption is available only to certain issuers that are not SEC-reporting companies. Following its completion of a Regulation A offering, an issuer is not subject to ongoing disclosure obligations (unless it has undertaken multiple offerings and become subject to Exchange Act reporting requirements as a result of the dispersed nature of the holdings of its equity securities). As a result, there may be limited publicly available information about the issuer. The issuer may voluntarily choose to apply to have its securities listed or quoted on a national securities exchange, but it is not required to do so.
Finra review For any public offering of securities, Finra Rule 5110 prohibits Finra members and their associated persons from participating in any manner unless they comply with the filing requirements of the rule.28
Rule 5110 also contains
rules regarding underwriting compensation. Rule 5110(b) requires that certain documents and information be filed with and reviewed by Finra, and these filing and review requirements apply to securities offered under Regulation A.29
JOBS Act Quick Start 51
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