Regulation A has two offering tiers, Tier 1 and Tier 2, and each is dealt with differently by the SEC and state blue sky regulations. Regulation A offerings are subject to state Blue Sky laws regarding the issuer's offering and sale of securities as well as the resale of securities by investors.
How these State Blue Sky laws affect liquidity and investor resales of the offering, also referred to as secondary sales, is a topic that is occasionally overlooked in Regulation A offerings. To successfully raise capital, it is crucial to take investors' market liquidity into account so that they are aware of their exit options.
Every offer and sale of a security must typically either be registered with the U. S. The offer and sale must be eligible for an exemption from registration from the Securities and Exchange Commission ("SEC") before they can be made. This holds true for both securities offerings made by the issuer and resales made by investors who buy the issuer's securities. State Blue Sky laws offer the same registration for securities and exemptions from such registration as the federal securities laws do.
State Blue Sky laws that regulate secondary trading do not apply to the trading of issuers listed on national security exchanges like the New York Stock Exchange ("NYSE") and the NASDAQ Stock Market ("NASDAQ"). despite the fact that businesses cited.
on the OTC Markets must abide by State Blue Sky laws, and investors in OTC Markets issuers must abide by the resale regulations for the securities they purchase in Regulation A Offerings.
State Blue Sky Compliance in Regulation A Offerings: Tier 1 vs. Tier 2 of Regulation A.
Regulation A has two offering tiers, Tier 1 and Tier 2, and each is dealt with differently by the SEC and state blue sky regulations.
An issuer may raise up to $20 million in a calendar year under Regulation A Tier 1, which offers an exemption from SEC registration. This amount rises to $50 million over the course of a year under Tier 2 of Regulation A. If an issuer is proposing securities worth less than $20 million, they can choose to continue under Tier 1 or Tier 2 of Regulation A, provided they meet the necessary requirements.
Companies that conduct Regulation A Tier 1 offerings of securities are obligated to abide by the laws and rules of each state in which they intend to sell and offer the securities. The North American Securities Administrators Association ("NASAA") review program should be used by businesses. Issuers conducting Regulation A Tier 1 securities offerings are allowed, under the NASAA coordinated review program, to send the administrator of the review program their Regulation A offering materials via email. In the states that take part in the NASAA coordinated review program, the Tier 1 securities offering will be compliant with the relevant blue sky laws once it has been approved.
State blue sky laws do not apply to securities offerings made in accordance with Tier 2 of Regulation A, which are considered "covered securities" under the National Securities Markets Improvement Act of 1996 ("NSMIA"). However, some states may occasionally demand that the issuer pay a filing fee and/or provide a copy of the offering materials. It should be noted that observing state broker dealer and anti-fraud provisions is still necessary even if one complies with the NSMIA.
Resales in Regulation A Offerings that are Affiliate vs. Non-Affiliate.
Different procedures apply to the resale of securities acquired in Regulation A offerings by affiliates and non-affiliates. Affiliates of the issuer are only permitted to sell a maximum of 30% of the qualifying Regulation A offering's total dollar amount in secondary transactions. Secondary sales by non-affiliates are permitted after the first year, under either Tier 1 or Tier 2, up to the maximum offering amount.
Trading in secondary Regulation A offerings.
An issuer must abide by state laws that apply to secondary trading even if it complies with the State Blue Sky laws that apply to its Regulation A securities offering. This guarantees that investors in the issuer's Regulation A offering will be able to sell their shares again if they so choose. After the issuance of the securities and the investors' desire to resell the securities they bought, state blue sky compliance for issuers conducting both Tier 1 and Tier 2 offerings may become more challenging.
Reselling after Regulation A Offerings: Manual Exemption.
For secondary trading of securities sold in Regulation A Offerings, 38 states currently recognize the Manual Exemption. The issuer and the security must be listed in a securities manual approved by the particular state for use in order for the exemption from registration to be available. The securities manual must include the names of the issuer, its officers, and its directors, as well as its balance sheet and a profit and loss statement for either the fiscal year that came before the balance sheet or the most recent fiscal year of operations.
Unwanted Brokerage Deals.
Purchasers of securities through a Regulation A Offering may also rely on the exemption for unsolicited brokerage transactions, which exempts a transaction by or through a brokerage firm that executes an unsolicited order or makes an offer to buy securities. Any unsolicited transactions made by or via the issuer directly are not eligible for the exemption from the Unsolicited Brokerage Transaction.
The following elements affecting liquidity and resales should be taken into account by issuers conducting securities offerings under Regulation A.
Investors in Tier 1 Regulation A Offerings are only permitted to sell securities in secondary markets up to $6 million in a calendar month.
• Investors in a Tier 2 Regulation A Offering may not sell additional securities for more than 30% of the total offering price during the Regulation A offering and for a period of 12 months afterward.
• Following the SEC's qualification of the Form 1-A Offering Circular, the shares sold by non-affiliates in a Regulation A Offering are unrestricted securities.
• If an issuer wishes to have its shares quoted on the OTC Markets, the sponsoring market maker may submit a Form 211 to the Financial Industry Regulatory Authority ("FINRA") as soon as the Regulation A offering is qualified by the SEC.
• Following FINRA approval of the Form 211, the Issuer will become eligible to be quoted on OTC Markets OTCQX and OTCQB.
• After FINRA has approved the Form 211, the sponsoring market maker will quote the issuer's shares for the first 30 days.
• Securities sold in Regulation A Offerings may be subject to state blue sky laws governing secondary trading; issuers should confirm that an exemption is in place.
This securities law article is offered as a general informational service about Regulation A and going public to clients and friends of Hamilton and Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message establish an attorney-client relationship.
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