Regulation A (Reg A) has become a popular exemption utilized by security issuers (Issuers) looking to raise capital. Most Issuers are eager to start the process but it is important to know what to expect as far as timing and costs associated with your Reg A offering.
With regulators involved it can be difficult to estimate timing; typically, it takes between three to five months from the time an Issuer decides to launch a Reg A offering to the point where securities may first be sold – the qualification. The timing is largely due to the SEC and FINRA qualification and approval processes that must take place., The process may take longer if the regulators have delays on their end. There are effectively four phases for a Reg A: “testing the waters” (TTW), drafting the Form 1-A, SEC interactions, and drafting ancillary documents and marketing materials.
Unique to Reg A offerings is the ability to perform testing the waters) marketing efforts. This step is optional for the Issuer and allows them to be able to determine how successful a Reg A offering is likely to be. If an Issuer plans to take advantage of TTW, they will need to take into consideration the time involved in preparing the appropriate solicitation materials for these efforts and how long they want to wait before deciding to prepare and file a Form 1-A. Once a Form 1-A is filed TTW must stop.
The issuer has the discretion over how long the "testing the waters" solicitation period lasts. Typically it will take issuers between two and four weeks of TTW to decide whether they believe there is enough demand for their offering to justify the time and expense of creating and submitting an offering statement on Form 1-A. Depending on the working group's efforts, whether audited financial statements have already been completed, and time required to compile the information necessary for the offering statement, the preparation of the offering statement generally takes between 4 and 8 weeks to complete, if not more.
Once the ball is in the regulator’s court, there can be quite a bit of back and forth until the SEC greenlights the offering statement and specifies that the issuer may request a notice of qualification. The interactions with the SEC are composed of SEC comments and responses from the Issuer. This back-and-forth process is usually the longest part of the process and can take anywhere from 10 to 20 weeks. The Issuer and its broker-dealer intermediary should ideally have secured investor interest during the TTW period so that the offering can be completed right away after qualification. This post-qualification process, however, may take several weeks in some circumstances, particularly when there is no broker-dealer involved. Once the offering has been qualified then it is time to start selling.
There are two tiers of Reg A offerings: Tier 1 and Tier 2. Issuers can raise up to $20 million during a 12-month period for Tier 1 offerings, or up to $75 million during a 12-month period for Tier 2 offerings. A Reg A campaign could theoretically be continued after the 12-month period, but in order to do that so, the issuer must begin the SEC qualification process all over again. It is also important to remember that any other security issuance during a Reg A offering may be integrated with the Reg A offering causing companies to exceed the maximum fundraising amount.
Reg A is highly regulated. This means it is the most expensive form of exempt security offerings for issuers. The upfront cost associated with Reg A issues is usually $100,000+. These fees include legal, accounting, filing, advisory, etc. Marketing is optional but can be the most expensive and can run you up to $300,000. A qualified securities attorney is required to file a Form 1-A, just like with a conventional IPO S-1. There is a tremendous amount of tedious paperwork involved. The price range for the legal work in a Reg A offering can be between $50,000 and $70,000, and sometimes may exceed that.
All Reg A offerings require two years of audited financials =. In terms of ongoing reporting, Tier 2 demands additional work, which raises total expenses. You should anticipate a range of $12,000 to $30,000, depending on the firm. The involvement of a broker-dealer will also have associated costs which are generally structured as negotiated “success” fees that typically range from 5 to 10 percent of the raise itself. There may also be a retainer in addition to the success fee. This may sound expensive, but these groups have the power to turn your offering into a success.
In sum, Reg A is a useful exemption to take advantage of in order to raise capital but needs to be handled properly in order to maximize the Issuer’s return on spending and the time spent in preparation. It is highly recommendable to contact professionals who are cognizant of your budget and able to provide flexible support as needed.
Sources
“How Much Does a Reg A+ Offering Cost?” Edgaragents.com, 4 Apr. 2018, https://www.edgaragents.com/much-reg-offering-cost/.
BevilacquaSHARE, Lou, and Lou Bevilacqua. “Timeline and Cost Estimate for Regulation A+ Financing.” Bevilacqua PLLC, 5 Apr. 2018, https://www.bevilacquapllc.com/timeline-and-cost-estimate-for-regulation-a-financing/.
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