TIPS FOR SUCCESS
Tip of the Month: A Deep Dive into the SEC Qualification Process for Regulation A+ Offerings
What Does the SEC Qualification Process Entail for a Regulation A+ Offering?
One of the most critical steps in launching a Regulation A+ offering is obtaining SEC qualification. This process ensures that your offering meets regulatory standards before you can raise capital. Here's a deeper look at what this process involves:
1. Initial Filing: Submitting Form 1-A
The SEC qualification process begins with the submission of Form 1-A, which is the official registration document for Regulation A+ offerings. This form includes:
- Offering Circular: A detailed prospectus-like document outlining your business, financials, risk factors, and how you intend to use the raised capital.
- Financial Statements: For Tier 2 offerings, these must be audited by a certified public accountant (CPA). Tier 1 does not require audited financials but must comply with state-level securities requirements.
- Legal Disclosures: Including information about the company’s officers, directors, and any prior legal or financial issues.
Once your Form 1-A is submitted, the SEC begins its review process.
2. SEC Review and Comment Process
After the initial filing, the SEC reviews your submission to ensure compliance with securities laws and regulations. The review focuses on:
- Completeness and Accuracy: The SEC verifies that your offering circular contains all necessary disclosures and that the information is accurate and not misleading.
- Clarity of Disclosures: The offering document must clearly outline your business plan, risk factors, and financial condition so that investors can make informed decisions.
During the review, the SEC typically provides comments on your submission, which can include requests for additional details, clarification, or revisions to certain sections. This back-and-forth process, known as the comment letter process, can involve multiple rounds of feedback until the SEC is satisfied.
3. Responding to SEC Comments
Responding to SEC comments is a key step. Here’s how to navigate this:
- Timely Responses: Ensure that your legal team or advisors respond to SEC comments promptly to avoid delays. Each round of comments can add weeks to the process, so staying organized is critical.
- Clarity and Thoroughness: When responding, provide clear, detailed answers or revisions. Avoid ambiguous or partial responses, as this can lead to further rounds of comments.
- Updating the Offering Circular: Based on the SEC’s feedback, you may need to amend your offering circular. Ensure that updates are accurately reflected in all related sections and disclosures.
4. Final Qualification by the SEC
Once all comments have been addressed and the SEC is satisfied with your offering circular, the SEC will qualify your offering. It’s important to note that:
- Qualification vs. Approval: The SEC does not approve the offering; rather, it qualifies it, meaning that the company is allowed to proceed with selling securities to investors. The SEC’s qualification does not imply that the offering is a sound investment; it only indicates regulatory compliance.
The time frame for qualification varies but typically takes around 60 to 90 days from the initial filing, though complex offerings may take longer.
5. Post-Qualification Actions
Once the SEC qualifies your offering, you can:
- Start Selling Securities: You are now allowed to solicit and accept investments from accredited and non-accredited investors (depending on your offering tier).
- Launch Marketing Efforts: You can begin marketing your offering, including using online platforms and "testing the waters" materials if not already done.
- Blue Sky Law Compliance (Tier 1 Only): For Tier 1 offerings, ensure you comply with individual state securities laws (blue sky laws) before selling in those states.
6. Ongoing Reporting Requirements (Tier 2)
For Tier 2 offerings, qualification isn’t the end of the process. You’ll need to comply with ongoing reporting requirements, which include:
- Annual Reports: Filed using Form 1-K.
- Semi-Annual Reports: Filed using Form 1-SA.
- Current Event Reports: Filed using Form 1-U for significant company changes, such as changes in leadership or financial status.
Importance of a Broker-Dealer in the Process
A knowledgeable broker-dealer is crucial in expediting and managing the complexities of a Regulation A+ offering. Here’s why:
- Streamlining the Qualification Process: Broker-dealers understand how to prepare the offering in a way that addresses potential SEC concerns upfront, reducing the number of comment rounds and saving time.
- Efficient Marketing and Distribution: They have established networks and platforms to market your securities efficiently, helping you meet your capital-raising goals faster.
- Navigating Compliance: Broker-dealers help ensure that your offering complies with SEC regulations and state laws, avoiding unnecessary delays due to regulatory missteps.
By understanding and properly preparing for the SEC qualification process, you can ensure that your Regulation A+ offering is compliant and ready to attract investors as efficiently as possible.
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REG A+ FAQs
Is it Possible To Raise Capital For a Venture Capital Fund Using Reg A+?
Venture Capital Funds that use 60% or more in simple debt for certain specialized loan types and 40% or less in equity holdings, can raise capital through Reg A+. The relevant SEC regulations are Sections 3(c)(5)(A) and (B) of the Investment Company Act.
The key requirement to qualify under Section 3(c)(5)(A) or (B) is that the loans or receivables held by the issuer must have been incurred by the obligor to finance the acquisition of specific goods or services and not for general purposes. If an issuer relies on Section 3(c)(5)(A), the loans and receivables held by the issuer must represent all or part of the sales price of merchandise, insurance or services. If an issuer relies on Section 3(c)(5)(B), the credit extended to the obligor must have been used to pay for specific goods or services. The fact that an obligation is secured by eligible property such as machinery and equipment is not by itself sufficient to permit reliance on Section 3(c)(5)(A) or (B).
This is a specialized type of fund, contact us for more details.
What kind of funding is not allowed under Reg A+?
Reg A+ does not allow funding for the following:
• Companies with headquarters outside the U.S. or Canada. It is fine to move or set up the legal headquarters in the US or Canada for international businesses.
• Investment companies as defined by the Investment Company Act of 1940. Pure venture capital firms cannot use Reg A+. VC firms that are Debt based (minimum of 60% debt holdings) are allowed to use Reg A+ in specific circumstances - ask us and your securities attorney.
• Public companies. Reporting and non-reporting public companies are allowed to use Regulation A+.
• Development stage companies with no business plan or purpose.
• Companies issuing fractional, undivided interests in oil, gas, or mineral rights.
• Companies disqualified under the “bad actor” rules.
That’s it. If your company doesn’t fall into one of those exclusions, you’re eligible.
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See why so many Issuers trust us to facilitate a successful offering.
CONSIDERING A REG A+ OFFERING?
Entoro Capital is a FINRA-registered Broker-Dealer in all 50 states, Puerto Rico, and the District of Columbia. The top choice for a Reg A+ broker-dealer and will answer all your questions. We support Issuers through the entire Reg A+ process from pre-filing preparation, to SEC review, marketing selection, and completion of the offering. Call Entoro today and let our team show you how to Reg A+ the right way.
ENTORO REG A+ CONTACTS
Sean Levine Abdissa Gemechu
Managing Director Director
Entoro Capital, LLC Entoro Capital, LLC
D: +1 917.715.1489 O: +1 713.823.2900
E: slevine@entoro.com E: agemechu@entoro.com
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