Will

Regulation A+ be a more popular choice for smaller

companies than Regulation D?
Rule 506 of Regulation D is the most widely used capital raising
exemptions under the US securities laws, largely due to its flexibility.
Regulation A+ provides a new way for smaller companies to raise
capital and get some liquidity in their securities. However, if a company
is confident that it can raise money through the traditional Rule 506
private placement, it may still want to avoid the SEC review process, the
hassle of Blue Sky compliance under Tier 1, and the ongoing reporting
obligations of Tier 2.

The new Regulation A, commonly referred to as Regulation A+, is a
significant improvement over the old Regulation A, which was rarely
used in any event. The old Regulation A permitted exempt offerings up
to $5 million in any 12-month period, including up to $1.5 million of
securities offered by security holders of the company. The thresholds of
Regulation A+ are much higher.

There are two tiers for Regulation A+: Tier 1, for offerings up to $20
million in a 12-month period, with not more than $6 million in offers by
selling security-holders that are affiliates of the issuer; and Tier 2, for
offerings up to $50 million in a 12-month period, with not more than
$15 million in offers by selling security-holders that are affiliates of the
issuer.

Although Rule 506 does not provide an opportunity for selling security
holders to participate in the offering, it does not have any caps on the

amounts that can be raised, and, while any company, public or private,
US or foreign, can raise capital under Rule 506, under Regulation A+
only a US or Canadian issuer that is: a) not a reporting company under
the Securities Exchange Act of 1934, b) not an investment company, and
c) not a blank check company is considered an eligible issuer.
Still, in some instances, Regulation A+ appears to be more
accommodating than Rule 506. For example, while Rule 506(b allows an
unlimited number of accredited investors, it allows only 35 non-
accredited investors.
Tier 1 of Regulation A+ does not have any limitation on the number or
type of investors, but Tier 2 imposes a per-investor cap for non-
accredited investors of the aggregate purchase price to be paid by the
purchaser for the securities to be no more than 10% of the greater of
annual income or net worth for individual investors or revenue or net
assets most recently completed fiscal year for entities.
In addition, Regulation A+ allows issuers to test-the-waters by trying
to determine whether there is any interest in a contemplated securities
offering (assuming such practice is allowed under applicable Blue Sky
laws for Tier 1 offerings), Rule 506(b does not allow for general
solicitation and advertising, though of course Rule 506(c does.
The biggest downside of Regulation A+ is that Blue Sky registration
requirements are not preempted for Tier 1 offerings, which significantly
limits offerings in multiple states, while such preemption does exist for
Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.)

But note that the welcomed flexibility of doing nationwide

offerings under Tier 2 comes with a heavy price tag of ongoing
reporting. After a Tier 2 offering, an issuer must file with the SEC
annual reports on Form 1-K, semi-annual reports on Form 1-SA and
current reports on Form 1-U (within 4 business days of the event).
The SEC has observed that companies may voluntarily file quarterly
financial statements on Form 1-U, but the practical effect of desired
compliance with Rules 15c2-11 and Rule 144 to maintain placement of
quotes by market makers and re-sales of securities, will lead to
voluntary quarterly reporting becoming essentially mandatory.
Rule 506 offerings are accompanied by private placement memoranda
or PPMs, (even when offerings are solely to accredited investors) to
protect issuers from Rule 10b-5 liability under the Exchange Act. Still,
there is no prescribed format for such PPMs and they are not
reviewed by the SEC.
With Regulation A+ offerings, an issuer must file Form 1-A (a mini
registration statement) through EDGAR with the SEC. First-time issuers
are eligible to initially do a non-public submission of a draft of Form 1-A.
Such Forms 1-A are subject to the SEC review and comment process,
which increases the cost of the transaction and extends the time from
the beginning of the transaction and the closing.
Finally, the bad actor disqualification applies to both Rule 506 and
Regulation A+ offerings. However, a company that had its registration
revoked under Section 12(j) of the Exchange Act within five years
before the filing of the offering statement or that has been delinquent in
filing required reports under Regulation A+ during the two years before
the filing of the offering statement (or for such shorter period that the

issuer is required to file such reports) is not eligible to do an offering

under this Regulation.