SEC Releases Proposed Rules for Regulation A+ under the JOBS Act: A Promising and Innovative Route to Capital Formation for Young Companies

by McCarter & English, LLP

The SEC has released long-awaited proposed rules to implement Title IV of the JOBS Act, now known as Regulation A+.1 This regulation could bridge a difficult gap for small companies looking to raise capital. If your company has a financing goal larger than privately sourced equity generally permits, but is not ready for the expense and risk of an IPO, Regulation A+ is worth your attention.

Regulatory compliance costs of IPOs average $2.5 million initially, followed by an ongoing $1.5 million per year, according to comments in the SEC publication. But you may be able to use Regulation A+ to achieve a similar result—a public offering exempt from registration resulting in freely tradable shares—for a fraction of that cost.

By permitting companies to raise up to $50 million annually, Regulation A+ addresses a major problem of current Regulation A offerings, which were capped at $5 million annually.2 The SEC proposes two levels for Regulation A+: Tier 1(up to $5 million in any 12-month period, including up to $1.5 million for the account of selling securityholders) and Tier 2 ($50 million and $15 million, respectively). The proposals preserve attractive parts of current Regulation A and would overcome some major stumbling blocks. Notable highlights include:

  • U.S. and Canadian companies are eligible to use Regulation A+. Generally speaking, they must be operating companies. Certain types of companies (e.g., “blank check” companies and investment companies) and those that are already required to file SEC reports are not eligible.
  • Securities that young companies typically sell are eligible. These include equity (common and preferred stock) and debt as well as options and warrants and their underlying shares. 
  •  Tier 2 Investors may not invest more than the greater of 10% of their net worth or annual income. Issuers are required only to notify investors of these limits and need not independently verify investor eligibility.
  • A company could “test the waters” for investor interest even before filing documents. The proposed rules offer considerable flexibility for companies to gauge investor interest before incurring large expense. With certain precautions, a company could communicate orally or in writing with any potential investor to determine their level of interest before filing its offering statement. After the public filing but before SEC qualification, a company may use its preliminary offering circular to make written offers.
  • The Form 1-A offering statement contains itemized information similar to Form S-1 for registered IPOs, but is scaled back. It has three parts: notification, offering circular, and exhibits. The SEC staff would review and comment on it, and companies may not use an offering circular for sales until the SEC approves. Generally, two years of financial statements are required, but only Tier 2 offerings require audited statements.
  • The offering statement could be submitted confidentially to the SEC. This would allow a company to “test the waters” without publicizing the offering. When qualified, amendments and SEC comments to the offering statement will become public.
  • Tier 2 offerings would be exempt from state “blue sky” regulation. For Tier 2 offerings, this means that the review and qualification of the offering statement is limited to the SEC at the federal level. The proposed rules would also allow a company doing a Tier 1 offering to “test the waters,” but the company could sell the securities only after qualification of the offering statement by the relevant state securities regulators as well as the SEC.
  • Ongoing SEC reporting for Tier 2 issuers is less demanding than for other SEC reporting companies. Tier 2 companies would be required to file ongoing reports electronically with the SEC: an annual report on Form 1-K, semiannual reports on Form 1-SA, and current reports on Form 1-U. Although based on the continuous disclosure regime for registered companies, the reporting for Tier 2 companies is less demanding. Form 1-K has fewer disclosure items than Form 10-K; Form 1-SA is a semiannual report rather than a quarterly 10-Q report; and fewer events trigger an immediate Form 1-U compared with Form 8-K. Tier 1 companies file a one-time report, but would not be subject to ongoing reporting.
  • Tier 2 companies could develop a trading market for their shares. The ongoing-reporting regime for Tier 2 companies allows them to create a public market for the securities sold under Regulation A+. This is essential for initial investors desiring to resell shares bought in a company’s offering and for later investors wanting to buy and sell on the open market. Of course, development of an active market remains uncertain as the securities would presumably be sold over-the-counter.
  • Tier 2 companies could finance using shelf and continuous offerings. The proposed rules modernize current Regulation A by enabling companies to use finance techniques often used by young companies, but are now generally limited to companies that are fully SEC reporting with stock listed on a securities exchange. This would mean that Regulation A+ companies could undertake so-called “shelf” offerings and also qualify the public resale of shares issued on exercise of warrants and options.

What Companies Should Consider Regulation A+?
Although its benefits are obvious, Regulation A+ is not appropriate for every company. In particular, a company thinking about a Tier 2 offering should consider whether it is ready for the ongoing reporting and development of a trading market for its shares. You could view Regulation A+ as yet another answer to the problem addressed by the JOBS Act – how to ease capital formation by small companies that find fundraising from family and friends too restrictive, the bar too high if limited to venture capital firms, and expense and completion risk too great in a traditional IPO. The JOBS Act addresses these with (1) crowdfunding (for very early stage companies), (2) generally advertised private placements (enabling access to a larger pool of investors, but purchasers must be accredited), and (3) the IPO for emerging-growth companies (reduced registration requirements, on-ramp to becoming fully SEC reporting). Regulation A+ fills a gap between (2) and (3) by permitting a public offering of substantial amounts without registration, yet enabling a resale trading market for investor exits and after-market purchasers. And the companies relying on Regulation A+ wouldn’t have to close the door on an eventual transition to becoming a full Exchange Act reporting company and possible national securities exchange listing.

1 The SEC’s discussion of the proposed rules cites a number of suggestions in our July 2012 comment letter to increase the attractiveness of the Regulation A+ finance option.

2 The relatively high transaction costs (given the low annual cap) arising from compliance with both federal and state securities regulators, and resulting delays, have been cited for the decline in use of current Regulation A.

Written by:

McCarter & English, LLP

McCarter & English, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.