What it means
Regulation A is an exemption from the full registration process that applies to many public offerings. A company using it files Form 1-A, the SEC reviews and qualifies the statement, and the company can then sell shares to the public, including to ordinary investors.
It is sometimes described as a mini public offering. The regulation has two tiers.
Tier 1 allows smaller offerings but requires registration or review in each state where shares are sold. Tier 2 allows larger offerings, preempts most state review and requires audited financial statements and ongoing reports, and the amount that can be raised in a twelve-month period is capped by SEC rules that may be adjusted over time.
The form is divided into parts. One covers basic information and the structure of the offering, another is the offering circular, which is the document investors read, and a third lists exhibits such as the charter and material contracts.
The circular includes the business description, risk factors, use of proceeds, management details and financial statements. After qualification, Tier 2 issuers must keep reporting to the market.
They file an annual report on Form 1-K, a half-year report on Form 1-SA and current event reports on Form 1-U, which are lighter than the equivalents for fully listed companies. These obligations give investors continuing information without the full cost of registration.
For a company the attractions are cost and access. Regulation A can be cheaper than an IPO (initial public offering) and allows ordinary investors to participate, although the process still requires lawyers, auditors and careful disclosure.
It does not guarantee a listing on a stock exchange or any trading market. Founders should weigh the trade-offs.
Public disclosure exposes strategy and finances, and failure to follow the rules can lead to liability. A securities lawyer should always guide the choice of route.
In practice
Real-world examples.
Example
A craft brewery files Form 1-A to raise $8,000,000 from customers and local investors. Its offering circular explains the brewing business, the planned expansion and the main risks. Many of its investors are customers who already buy the beer.
Example
A fintech start-up uses a Tier 2 offering to raise growth capital from the public, with audited accounts. After qualification it files annual and half-year reports so that investors can follow its progress. The company budgets about $150,000 a year for audit and reporting costs.
Example
A real estate company considers Regulation A but compares it with a conventional IPO. Its lawyers conclude that the lighter reporting and lower cost suit a raise of this size. They also warn that the company will still need to explain its risks plainly.
Formula
Calculation
Gross Proceeds = Shares Sold x Offering Price
Net Proceeds = Gross Proceeds - Offering Costs
Cost Ratio = Offering Costs / Gross Proceeds x 100
Worked example for a fictional company. It qualifies an offering of 2,000,000 shares at $5 each and incurs $600,000 of legal, audit, filing and marketing costs.
Gross Proceeds = 2,000,000 x $5 = $10,000,000
Net Proceeds = $10,000,000 - $600,000 = $9,400,000
Cost Ratio = $600,000 / $10,000,000 = 0.06 = 6%Case study
Seen in the real world.
Sunrise Cycles is an illustrative, fictional electric bicycle maker with a loyal customer community. It wanted to raise $12,000,000 without the expense of a full IPO and chose a Tier 2 offering.
The company spent four months preparing its offering circular, with audited accounts and a detailed risk section. After a few rounds of comments from the SEC staff, the statement was qualified and the company began selling shares through an online platform.
By the end of the illustrative offering it had raised $9,500,000 from several thousand investors. The founders reported that the process was demanding but gave them both capital and a community of shareholders who bought the product. The company noted that costs of roughly $700,000 were deducted from the amount raised, which reduced the net proceeds to $8,800,000.
Watch out
Common mistakes.
- Assuming a Form 1-A offering guarantees that the shares will trade on an exchange.
- Underestimating the legal, audit and filing costs, which can be a substantial share of the amount raised.
- Overlooking ongoing reporting duties in Tier 2, which continue after the offering closes.
Questions
People also ask.
What is Regulation A?
It is an SEC exemption that lets companies sell securities to the public through a streamlined offering process, with a limit on the amount in a twelve-month period.
What is the difference between Tier 1 and Tier 2?
Tier 1 is for smaller offerings and involves state review, whereas Tier 2 allows larger offerings, requires audited accounts and ongoing reports and limits state review.
Who can invest in a Regulation A offering?
In general, both accredited and non-accredited investors can take part, although Tier 2 can limit how much a non-accredited investor invests, so offerings include checks on investor eligibility.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related