What Entrepreneurs Should Know for Reg A+ Offering Prep
For a successful raise via Reg A, it’s important for companies to relate with consumer investors, which means getting the right document prep, the correct insurance, and providing the right marketing.
When raising capital via a Regulation A offering, private companies will be ‘testing the waters’ to discover whether their service or product is worthwhile.
Companies can raise using general solicitation to attract investors and raise funds from a broad range of investors (accredited & non-accredited) and will likely require insurance when raising Reg A.
In this post, we’ll explore what you need to know when considering or prepping for a Reg A Offering.
What is a Regulation A offering?
A Regulation A offering of Title IV (JOBS ACT) is an offering type private companies can utilize to raise up to $75 Million from the public. It came into effect on June 19, 2015 (updated March 15th, 2021), giving private companies the opportunity to raise money from the public.
Over the past few years a large number of companies have been making their IPO through the Regulation A route. Doing this is allowed, but it’s not required.
Those looking to raise less than $5M may consider Regulation Crowdfunding to be a better fit.
Do I need Insurance with a Reg A offering?
Yes, insurance is likely required when a company is raising via Reg A, even if you are raising your first dollar via Reg A+. Some companies simply call this Reg A insurance or insurance for Reg A issuers.
To determine if you need insurance, there are questions to ask and characteristics specific to Regulation A that warrant the need for a customized insurance product tailored for companies leveraging Reg A.
Here are the characteristics that are specific to Reg A:
Are you raising capital from non-accredited investors?
Are you generally soliciting investors?
Do you have any external board members?
Are you generating more than $500k of ARR?
Do you operate in a regulated industry?
Do you have more than 5 employees in CA, NY, or FL or more than 25 in the US?
Many companies are saving up to $50k for Reg A related insurance policies. - Your Broker-Dealers, capital raising SaaS platform, legal counsel, among the other key players have partnered with a US-based InsurTech called Assurely to bring the most cost-efficient, tech and data driven insurance solutions to innovative companies like you.
What Reg A risks do I need to cover?
Investor claims (or complaints) is your biggest risk you need to protect against.
If you answered yes, above, to either raising capital from non-accredited investors and/or generally soliciting investors, you will need a custom insurance product tailored to Reg A issuers that covers investor claims.
Covering investors claims as part of your Directors & Officers policy is generally not available from traditional insurance companies.
Assurely, in partnership with Reg A industry constituents, offers a product called the TigerMark Directors & Officers insurance program that is specifically tailored for Reg A issuers. TigerMark is well known as the market-leading insurance program for companies who have raised via Reg CF, Reg A, and/or Reg D - 506(c) .
Assurely has built a slick, tech-driven process to make the process easy to determine what and how much you should buy. They have also embedded a host of forward-thinking features and benefits for both companies and their investors; many of which are starting to be requested by companies across all insurance products.
Some of those features and benefits include no upfront costs (only pay after your raise is successful), guaranteed pricing before you raise, and an innovative investor benefit inclusive of an external symbol of trust you can communicate as part of your capital raise.
The TigerMark Directors & Officers insurance program and Assurely has become the market norm for companies that are or have raised capital using Regulation A.
How should I Prepare for a Reg A offering?
Reg A offerings are also known as a ‘mini-IPO’ and will have a fair amount of costs.
Additionally, document prep is not always simple, so it’s important to prepare your offering document properly. There are software systems that support this as well as legal counsel that is focused on Reg A offerings such as CrowdCheck Law.
Here’s how private companies can prepare for a Reg A offering:
Form 1-A & Document prep
Get qualified
Get insurance in place before you begin your raise (no cost unless you are successful options are available)
Raise capital
KoreConX, an all-in-one platform, expands the estimated costs for USA based companies here.
If the raise is successful, the company will need to provide semi-annual, annual, and event reports. If not, investor funds are returned.
How much does a Reg A offering cost?
Regulation A+ offerings cost on average $75,000. In many cases, the costs are 35k -50k minimum. This price may vary and it's best to check with proper consultation.
It's required that Regulation A offerings are at a fixed price. Regulation offerings cannot be variably priced and or be used to qualify shares of underlying derivative security that is variably priced. Additionally, Regulation A can not be used for indirect primary offerings
Companies raising via Regulation A have the options of Tier 1 and Tier 2 offerings. Going the Tier 1 route means companies must register/qualify with all the states they plan to sell securities in. However, with Tier 2 Regulation A offerings, companies are exempt from Blue Sky laws.
Tier 1: Companies can raise up to $20M and are not exempt from Blue Sky laws.
Tier 2: Companies can raise up to $75M and are exempt from Blue Sky laws, which may carry fees depending on your state.
Is a Reg A offering a public offering?
For NYSE & NASDAQ, a Regulation A can be used as an initial public offering. Companies can make their IPOs through the Regulation A route which is allowed but not required.
Benefits of a Reg A offering
Using Regulation A allows for a number of benefits as well as flexibility that include, but are not limited to companies saving money on legal costs. Typically, Regulation A offerings will end up costing less than reverse mergers and initial public offerings (IPOs).
Also, the requirements for reporting, a Form 1-A, are significantly less complex than an S-1.
Benefits include:
The offering can be done before anything is filed with the SEC, allowing companies to ‘test the waters’ and discover if there’s interest (or not).
Allows private companies (US & Canada) to raise up to $75M from accredited and non accredited investors via general solicitation.
Regulation A is also known as a mini-IPO since the procedure is similar to an IPO, but there's less cost and documentation.
Can conduct continuous offerings, share price is not required to be set at time of qualification.
What is the difference between Regulation A and Regulation crowdfunding (Reg CF)?
Here are the differences between raising Reg A and Reg CF:
Regulation Crowdfunding allows companies to raise up to $5M every 12 months. Regulation A: Tier 2 on the other hand is a ‘mini IPO’, where you can raise up to $75 million dollars.
With Regulation A, promoting options are not as limited; for example, Reg CF companies must promote their offering through a funding portal, whereas Reg A allows for a broad range of media outlets.
Regulation A will have to get the filing approved/qualified by the SEC. When raising funds via Regulation Crowdfunding, you’ll file a Form-C beforehand.
What is the difference between Regulation D and Regulation A
Here are the advantages, disadvantages and limitations of raising via Regulation A vs Regulation D:
With a Reg A offering, you can raise from non-accredited investors
You have the opportunity to create a much stronger relationship with end users by inviting your community, customers, and crowd to participate your capital raise
Reg D entails minimal document prep, especially when compared next to Reg A offerings.
Reg D does not limit on the max amount you can raise
Reg D requires significantly less expenses than raising via Reg A
Reg A offerings can take over 3 months to prepare due to (auditing, legal)
Reg A offerings allow for an IPO (NYSE or NASDAQ)
Reg A has a $75M cap on how much you raise per year.
Bottom Line
Companies can prep for a Reg A raise by filing a Form 1-A offering statement, getting qualified, marketing their raise, and getting the proper insurance in place
Not only are the reporting requirements more simple than a S-1 when raising via Regulation A, but companies can end up providing less legal costs than an IPO. Insurance is typically required for a Reg A offering and once your raise is successful, you will need to have insurance already in place (D&O specifically).
