Sure, there has been a lot of talk of Regulation A. Under Tier 2 of Regulation A, you can raise up to $50 million from the crowd – everyday folks (under Regulation A, investors do not need to be accredited investors). As a company you might be thinking, great, sign me up and how quickly can I get started? While Regulation A is the right fit for some companies, it is not the right fit for all companies. Below, we go through some threshold questions about eligibility to see if Regulation A is available to you.
1. Is your company organized in and with its principal place of business in the United States or Canada? (If yes, skip to question 2)
Regulation A is only open to companies with their principal place of business in the U.S. or Canada and organized in the U.S. or Canada. What if you don’t meet that requirement; is this a deal killer? It depends … do you have do you have a U.S. or Canadian-based operating subsidiary with genuine operations that could be the issuer company (if yes, we are off to question 2)? Alternatively, you could restructure your company to have an operating subsidiary in the U.S. or Canada (if so, you should talk to an advisor to see if restructuring and Regulation A makes sense for you).
2. Is your company already subject to the reporting requirements of the Exchange Act ("reporting companies")? Is your company an investment company or fund (including a business development company), a blank check company, or a company issuing interests in oil and gas developments? (If you answered no to all of these, skip to question 3)
Regulation A might not be in the cards for you. Note that “blank check” doesn’t mean companies that don’t have operations yet. It means companies that have no idea what they are going to do with the money they are asking for. If you have a plan to buy identified assets or assets that that meet certain specifics, you aren’t a blank check company.\
3. Can you get clean audited financials for the two most recent fiscal years? (If yes, still read below)
You might be thinking “we are all math-whizzes – no problem.” Unfortunately, there are pitfalls out there for the unwary. Do you have inventory? Do you keep proper books? Do you properly account for all stock issuances and options? If you said yes to the first question or no to the other two, does this mean that you will not be able to issue securities under Regulation A? No; however, it could impact the timing. You should talk to an auditor regarding whether you can get the requisite financials, and if not, perhaps start down the road, so a Regulation A offering is something that you can do in your next fiscal year or two.
4. Do you have any "bad actors" in the picture?
If your company or any of its covered persons (e.g., directors, executive officers, general partners, 20% beneficial owners) have committed any one of the enumerated bad acts, your company may be disqualified from an offering.
5. Do you have information you want to keep confidential?
This one is not so much a requirement as a consideration. Remember, a Regulation A offering is a public offering. Everything that is material to the company must be made public to allow investors to make an informed investment decision. This includes material contracts (including compensation agreements with management) that you might prefer stay confidential. While it is possible the SEC will allow redaction of some confidential information, that is a long process with an uncertain outcome.
Congrats! It looks like Regulation A could be something your company can do; whether you should do a Regulation A is another question. Certainly, these are not all the important factors in determining if Regulation A is right for you. Ultimately, it must make business sense to take on a large number of investors and become subject to the Regulation A ongoing reporting requirements. That is a decision you will need to make.