The Securities Act of 1933 requires all securities to be registered with the Securities and Exchange Commission (SEC). The definition of security is broad:
(1) The term "security" means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Regulation A Exemptions. Regulation A (Reg A) is an exemption from the general registration requirements of securities with the SEC that allows the general public to invest in private companies. Another benefit of Regulation A is that it allows the offeror to conduct a publicity campaign to test the public interest in investing in the company prior to issuing the securities offering.
The filing with the SEC is through form 1A. Arguably this provides the issuer/ offeror/ sponsor/ syndicator more protection through the Form 1A spec private placement memorandum the “letter” or summary type offering documents required by form D (and it can serve both as a compliance document and as a marketing tool). However, compliance with this regulatory exemption can be just as difficult as registering securities but, depending on how money is to be raised, has significant benefits.
To the extent that investors need to be accredited, Reg A cites to the definition in Reg D. Additionally, the same “bad actor” disqualification found in Reg D applies to Reg A. Since the Jumpstart Our Jobs Act in 2015, Reg A has been divided into two tiers.
Tier 1. The issuer relying on Tier 1 is limited to $20 million in a 12-month period in offerings, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.
The issuer must also provide an offering circular, which must be filed with and must be approved by the Securities and Exchange Commission (SEC) and securities regulators in the individual states relevant to the offering. State blue sky laws apply to Tier 1 offerings. On the other hand, companies issuing offerings under tier 1 are not required to produce reports continually. They are only required to issue a report on the final status of the offering.
For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
Tier 2. Companies can offer up to $50 million in a in a 12-month period, , including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer. The offering circular is required and is subject to review and vetting by the SEC, but a Tier 2 offering is not subject to blue sky laws and does not have to be qualified by any state securities regulators. Additionally, companies offering securities under tier 2 must produce continual reports on the offering, such as the annual report on Form 1-K, a semiannual report on Form 1-SA and a current report on Form 1-U.
Another significant difference is the limitation on the size of the investment if the securities offered are not going to be listed on a national securities exchange upon qualification. Investors either have to be an accredited investor or are limited to investing the greater of: (a) 10% of the investors individual or combined annual income, if married; or (b) 10% of the individual or joint net worth (for married persons) (excluding the value of the person’s primary residence and any loans secured by the residence—up to the value of the residence).