Preparing for an A+ grade: We had a great testing the waters campaign, can we do Tier 1 offering under Regulation A?

Short answer, no. Long answer, maybe, but only after you wait for an extended period of time to ensure that no state would consider your testing the waters campaign to be integrated with your current offering.  Why is this important? At CrowdCheck, we have heard advice making the rounds that seems to forget that the states have retained their ability to regulate the registration of securities under Tier 1 offerings.  And states do take their registration requirements seriously.

This post includes a survey of the filing requirements to communicate in a Tier 1 offering for all 50 states plus the District of Columbia and Puerto Rico. This post will not discuss the state notice filing requirements under Tier 2 of Regulation A, which appear to have some issues that need to be resolved and that we will discuss in the future.

First off, let’s recall what an “offer” is under state and federal securities law.  Under the Securities Act and most state securities laws, the definition of an offer is broadly interpreted.  The definition goes far beyond the definition of “offer” under contract law, as it does not require the recipient of the offer to be able to accept.  Instead, an offer of securities also includes the mere furnishing of information about a forthcoming sale of securities.  Those interested in the case law may recall SEC v. Arvida Corporation from their introduction to Securities Law course.  Testing the waters under Regulation A+ is such an offer of securities that is only allowable under the terms of new Rule 255.

Unfortunately, there are no state analogies to Rule 255.  Every state requires that some filing be made prior to any communication regarding an offering of securities — no ifs, ands, or buts about it.

When it comes to what needs to be filed prior to any communication, we start to see a bit of variation.  Of the 52 jurisdictions, 41 do allow for some type of communication before the offering is qualified.  Be aware, 11 states do not allow for any communication about an offering under Tier 1 of Regulation A before the offering has been qualified in the state.  However, of those 41 states that allow for pre-qualification communication, only 17 have provisions that allow for testing the waters communication with only a basic notice filing.  That leaves 24 states in which there must be a public registration statement, albeit preliminary, that must be publicly filed prior to being able to openly communicate about the proposed offering.

Here’s a summary of the provisions:

Condition for communication about the offering Yes (out of 52) No (out of 52)
Do I need to make a filing with the state? 52 0
Do I need to file a registration statement? 35 17
Does that registration statement need to be qualified? 11 41

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