What it means
Registering securities with the regulator is expensive and slow, which can put a public offering out of reach for a small business. Regulation A offers a shorter route, sometimes described as a mini-IPO (a smaller version of an initial public offering).
The company files an offering statement, the regulator reviews it, and the company can then sell to the public. The rule has two tiers.
The first has a lower ceiling on how much can be raised and also requires the offering to be cleared with state regulators, while the second has a higher ceiling, requires audited financial statements and ongoing reports, and takes priority over state clearance. The ceilings are set by regulation and have been adjusted over time, so they should be checked before planning.
Why would a company choose it? The main attractions are lower cost, the ability to market to ordinary investors and not just wealthy ones, and the option to test public demand for the business.
Companies can also use the process to build a base of customers who become shareholders. There are trade-offs.
The offering still requires lawyers, financial statements and a detailed document, and the limits on the amount raised mean it is not suited to a very large company. Shares sold under the rule may also be harder to trade than those on a national exchange, unless the company arranges a listing.
A separate rule shares the name. The Federal Reserve also has a Regulation A, which deals with the credit that Federal Reserve Banks extend to banks, often known as the discount window.
A reader should check the context to see which Regulation A is meant, since the two have nothing in common except the label. For a non-specialist, the point is that fundraising law offers several routes with different cost, speed and investor access.
Regulation A sits between a private placement and a full public offering. A founder weighing these options should ask a securities lawyer which one fits the amount and the type of investor.
In practice
Real-world examples.
Example
A craft brewery with loyal customers wants to raise funds for a new site. It files an offering under the rule and invites its customers to buy shares, raising money without the cost of a full stock market listing.
Example
A real estate technology start-up uses the higher tier to raise capital from the public. It provides audited accounts and agrees to file regular reports, and the investors receive shares they can trade after the offering.
Example
A bank treasurer reading a regulatory update sees a reference to Regulation A. She realises it is the Federal Reserve rule on lending to banks and not the securities rule, and she routes the document to the right team.
Formula
Calculation
Net proceeds = (shares sold x offering price) - offering costs
Suppose a company sells 2,000,000 shares at $5 each under the rule, raising 2,000,000 x 5 = $10,000,000. Offering costs for legal, audit and marketing come to 8% of the raise, which is 10,000,000 x 0.08 = $800,000. Net proceeds = 10,000,000 - 800,000 = $9,200,000.Case study
Seen in the real world.
Sable Creek Outfitters is an illustrative, fictional maker of outdoor clothing with a loyal online following. The founders wanted $6,000,000 to open a second factory and preferred to give their customers a chance to own part of the business.
A full registered offering was estimated to cost over $1,000,000 in fees and time, which was too much for the amount. The company's lawyer proposed an offering under Regulation A, at an estimated cost of about $450,000 including audit and legal work.
The offering raised $5,400,000 over nine months, a little below target but enough to fund the factory. The illustrative lesson is that the rule can open a route to the public market at a cost a smaller company can bear, though it needs patience and careful preparation.
Watch out
Common mistakes.
- Treating Regulation A as an exemption from all disclosure, when the company still has to provide a detailed offering document.
- Confusing the securities rule with the Federal Reserve rule of the same name.
- Ignoring the ceiling on how much can be raised, which is set by regulation and can change.
Questions
People also ask.
Who can use Regulation A?
Generally, smaller issuers organised in the United States or Canada that are not subject to certain exclusions can use it, though the eligibility rules should be checked.
How does it differ from a private placement?
It allows the company to sell to the general public, while a private placement is normally limited to a small group of qualified investors.
What is the difference between the two tiers?
The second tier has a higher fundraising ceiling and requires audited accounts and ongoing reports, while the first tier needs state-level registration.
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