SEC Proposes Changes to Regulation A, Increases Offering Limits

In the private placement world, the Regulation A market is sizeable. In total, issuers of Regulation A offerings reported raising around $2.4 billion USD in 382 qualified offerings between June 2015 and December 2019. Notably, nearly 91% of those funds were for higher capital offerings raised under Tier 2, so that’s where the Securities and Exchange Commission (SEC) focused its proposed changes to Regulation A.

Here’s how offering limits might increase and why. We’ll also talk about Rule 506(c) as a popular alternative SEC registration exemption to Regulation A, especially for certain issuers.

Background on Regulation A 

The SEC originally adopted Regulation A in 1936. In 2015, the SEC created two tiers of Regulation A offerings. Issuers with offerings at or under $20 million USD fall into Tier 1, and issuers with offerings up to $50 million USD choose Tier 2. 

Proposed Changes

In March, the SEC proposed Regulation A changes that would increase the maximum Tier 2 offering amount from $50 million USD to $75 million USD. Alongside the Tier 2 offering limit increase, the SEC also proposed to raise the offering limit for secondary Tier 2 sales from $15 million USD to $22.5 million USD. While some commenters requested that the offering limit be increased to $100 million USD, the SEC chose an "incremental approach." Additionally, the SEC anticipated that Tier 2 offerings would generally be nationwide and not local. They elaborate in the proposed rule documentation: "While issuers in Tier 2 offerings are required to qualify offerings with the Commission before sales can be made pursuant to Regulation A, they are not required to register or qualify their offerings with state securities regulators."

Whereas offer limits may change, investment limits would remain the same under these newly released rules. Accredited investors in Regulation A offerings will continue to have no investment limits, whereas non-accredited investors will continue to abide by Tier 2 investment limits based on either the income or net worth standard, whichever is greater in each individual case. Individuals and entities who meet or exceed certain income or net worth thresholds may qualify as accredited investors.

Under current rules, issuers need to choose a Regulation A alternative if their projects require a lot of capital. Therefore, raising the Regulation A offering limit may bring in experienced issuers and intermediaries, along with institutional investors. This change may also attract more established companies, including Exchange Act reporting companies. Finally, the proposed change "may enhance capital formation for those Regulation A issuers that have exhausted existing offering limits.”

Which Issuers May Not Use Regulation A?

The SEC limits Regulation A offerings to U.S. or Canadian issuers only. The following are examples of other excluded issuers:

1.    “Blank check” companies, usually formed without a business plan or to merge with a company yet to be identified.

2.    Registered investment or “business development” companies.

3.    Issuers of certain securities, such as oil, gas, or minerals.

4.    Any company subject to a Section 12(j) order offering limit within a 12-month period.

Some of these issuers may qualify for an alternative SEC registration exemption under Rule 506(c) of Regulation D of the Securities Act. While issuing a Rule 506(c) offering, general solicitation is allowed. Keep in mind though that Rule 506(c) offerings may be sold only to verified accredited investors. As a third-party verification service, VerifyInvestor.com reviews all investor documentation for issuers, including tax returns, statements, and other financial paperwork. Furthermore, issuers need not collect all the documentation from all their investors themselves. Instead, we request the documentation from investors directly, and submission is easy.