Regulation A Offering: Potentially Life Changing

Regulation A Offeringsregulation_a_offerings
There are two questions running through your head. What on earth is a “Regulation A Offering”? And – Why do I care about a Regulation A Offering as a personal investor?
Great questions, and as usual, the answer revolves around increasing your personal financial well-being. Never stop learning and it will pay off. This article is a great start.

What is a Regulation A Offering?

A regulation A offering is private form of capital raising that has much less stringent requirements than a public capital offering. The SEC approved this offering type to provide smaller companies a more cost-effective way to raise capital.

Regulation A Offerings: Significant Returns For Individual Investors?

Yes. A regulation A offering also provides individual investors the opportunity to invest in the type of company that would issue a Regulation A (smaller, high growth companies). Note that one should also be aware there are significant risks involved with investing in new small companies (the chance of failure is higher), but there is also an opportunity for rapid investment growth.

There are two types of Regulation A offerings:

1) Tier 1
• Allows a company to raise up to $20 million in any 12-month period. The Securities Exchange Commission (SEC) which in basic terms, is the U.S. governing body in relation to financial markets, will require the company to create an offering circular (a document explaining details of the investment). The SEC and state regulators must approve this document.
• A unique attribute of a Tier 1 Regulation A offering is that companies under its rule do not have continuous reporting requirements to the SEC or state regulators, other than the initial filing reporting.
• Important note: financial statements in a Tier 1 Regulation A offering do not need to be audited by an independent accountant

2) Tier 2
• Allows a company to raise up to $50 million in any 12-month period.
• In a Regulation A Tier 2 Offering, an independent accountant is required to audit the company’s financial statements on an on-going basis – although not explicitly mentioned in the Regulation A SEC memorandum, this is due to the fact that a Tier 2 is larger is dollar amount and carries more potential risk as a result.

Important note on Selling Shareholders – A Regulation A offering circular under both tiers will need to disclose whether the shares being sold are new shares, or shares being sold by current investors or insiders of the company. If current investors are selling them, it may be a signal(although not definitely) that the offering may be a poorly performing company, and as a result, shareholders are trying to sell off their shares to new investors. Be careful of this.

Initial Public Offering vs. Regulation A Offering

Again, many smaller companies will utilize a Regulation A offering to raise up to $50 million. The obvious downside relative to an initial public offering (a general public offering of securities) is that less money can be raised, as an IPO can raise an unlimited amount (think billions of dollars).

A good option is to speak to a trusted advisor, as although there are many Regulation A offerings that do not perform well, there are also many that do perform well, and they can be a smart diversification from traditional investments.