Regulation Alphabet Soup: What are the Differences Between Regulations A, A+, CF and D?

When a company sells securities in the United States, they must comply with many state and federal laws. This article will attempt to simplify the sometimes confusing landscape of the various regulations companies commonly use.


Preface

In order to legally sell securities in the U.S. a company must do one of two things:

  1. Register their securities with the Securities and Exchange Commission and follow all rules of an SE reporting company, or

  2. Fit within an exemption from registration that allows the company to avoid the huge expense of registering their securities and complying with ongoing reporting requirements.


This article will focus on the basics of the three of the most common exemptions from registration: Regulation D, Regulation A/A+ and Regulation CF.


Regulation D

By far, the most common exemption from registration used by companies to raise capital is Regulation D. Regulation D is broken down into two rules: Rule 506(B) and Rule 506(C).


Regulation D, Rule 506(B)

Rule 506(B) allows a company to raise an unlimited amount of capital without registering with the SEC. The following rules, amongst others, apply to a 506(B) offering:

  1. The company may accept investments from an unlimited number of accredited investors, and up to 35 non-accredited investors. Non-accredited investors must receive certain, detailed information from the company in order to invest.

  2. There is no requirement to file anything with the SEC prior to commencing a Rule 506(B) offering. However, the company must file Form D with the SEC within 15 days of the first sale of securities using this exemption. There are no ongoing reporting requirements for a Rule 506(B) offering.

  3. There is no state-by-state “Blue Sky” pre-approval or registration but companies must file state “notice” filings in states that require those for Regulation D offerings.

  4. The securities sold are restricted, meaning in most cases they are not liquid and cannot be sold until a certain time period has expired, and even then may be subject to certain restrictions on resale.

  5. No general solicitation (marketing of the offering) is allowed. The company raising the capital, or its investment advisor or broker-dealer must have a pre-existing, substantive relationship with any accredited investors that invest.

  6. There are no limits on the amount any investor may invest.


Regulation D, Rule 506(C)

Rule 506(C) went into effect as part of the JOBS Act in 2013. In a nutshell, Rule 506(C) is very similar to Rule 506(B) but allows a company to market their offering outside of investors with whom the company has a pre-existing, substantive relationship. The following rules, amongst others, apply to a 506(C) offering:

  1. The company may accept investments from an unlimited number of accredited investors. Non-accredited investors may not invest.

  2. There is no requirement to file anything with the SEC prior to commencing a 506(C) offering. However, the company must file Form D with the SEC within 15 days of the first sale of securities using this exemption. There are no ongoing reporting requirements for a Rule 506(C) offering.

  3. There is no state-by-state “Blue Sky” pre-approval or registration but companies must file state “notice” filings in states that require those for Regulation D offerings.

  4. The securities sold are restricted, meaning in most cases they are not liquid and cannot be sold until a certain time period has expired, and even then may be subject to certain restrictions on resale.

  5. General solicitation (marketing of the offering) is allowed. The company raising the capital, or its investment advisor or broker-dealer must does not need to have a pre-existing, substantive relationship with any investors.

  6. There are no limits on the amount any investor may invest.

  7. Unlike Rule 506(B), the company cannot rely on the word of an investor that he or she is “accredited.” Under Rule 506(C), a company must take “reasonable steps” to verify that an investor is accredited, including such steps as reviewing the investors financial statements or tax returns, or obtaining a letter from the investor’s lawyer, accountant or broker verifying that accredited status.

Regulation A/A+

Regulation A and Regulation A+ are the exact same thing. People use the terms interchangeably. Technically, Regulation A is the older law that was amended by the JOBS Act, and went into effect with the changes in 2015 as Regulation A+. But, the SEC and others use both terms to describe the present law.

There are two “tiers” of Regulation A: Tier I and Tier II. Tier II allows a company to raise up to $50 million in capital per year from anyone in the general public, regardless of their wealth, while Tier I is limited to $20 million per year. The following rules, amongst others, apply to a Regulation A Tier II offering, which is far more popular than Tier I, discussed later:


Regulation A Tier II

  1. The company may accept up to $50 million of investments from an unlimited number of accredited investors and non-accredited investors per year.

  2. Prior to commencing a Regulation A, Tier II offering, the company must go through a review process with the SEC. Once the SEC reviews the filing, it will “qualify” the offering and the company may then sell its stock to the general public. There are also ongoing reporting requirements for a Regulation A, Tier II offering.

  3. As part of the filing with the SEC, a company must have up to two years of audited financial statements to file with the SEC.

  4. Accredited investors have no limit on the amount they may invest. Non-accredited investors are limited to 10% of the greater of the investor’s (a) annual income or net worth if a natural person or (b) not more than 10% of the greater of the investor’s revenue or net assets for such investor’s most recently completed fiscal year end if a non-natural person.

  5. For Tier II, there is no state-by-state “Blue Sky” pre-approval or registration but companies must file state “notice” filings in states that require those for Regulation A offerings.

  6. The securities sold are not restricted, meaning in most cases they are liquid and may be sold immediately. The securities may be listed on a national exchange or traded privately.

  7. General solicitation (marketing of the offering) is allowed. The company raising the capital, or its investment advisor or broker-dealer must does not need to have a pre-existing, substantive relationship with any investors.

  8. Founders and other shareholders may sell some of their shares in a Regulation A, Tier II offering, subject to certain limitations.

  9. Only U.S. and Canadian companies with a principal place of business in the U.S. or Canada may use Regulation A, Tier II.

Regulation A Tier I

  1. The company may accept up to $20 million of investments from an unlimited number of accredited investors and non-accredited investors per year.

  2. Prior to commencing a Regulation A, Tier I offering, the company must go through a review process with the SEC. Once the SEC reviews the filing, it will “qualify” the offering and the company may then sell its stock to the general public. There are no ongoing reporting requirements for a Regulation A, Tier I offering.

  3. The company must file audited financial statements with the SEC.

  4. No limits on the amount any investor may invest.For Tier I, the company must follow state-by-state “Blue Sky” requirements, including any pre-approval or registration in any state where their offering will be sold.

  5. The securities sold are not restricted, meaning in most cases they are liquid ad may be sold immediately. The securities may be listed on a national exchange or traded privately.

  6. General solicitation (marketing of the offering) is allowed. The company raising the capital, or its investment advisor or broker-dealer must does not need to have a pre-existing, substantive relationship with any investors.

  7. Founders and other shareholders may sell some of their shares in a Regulation A, Tier I offering, subject to certain limitations.

  8. Only U.S. and Canadian companies with a principal place of business in the U.S. or Canada may use Regulation A, Tier I.

Regulation CF

Regulation CF was passed as part of the JOBS Act and went into effect in 2016. The following rules, amongst others, apply to a Regulation CF offering:

  1. 1. The company may accept up to $1.07 million of investments from an unlimited number of accredited investors and non-accredited investors.

  2. 2. Prior to commencing a Regulation CF offering, the company must file certain documents with the SEC. There is no SEC review process. There are some ongoing reporting requirements for a Regulation CF offering.

  3. 3. The company must have to file certain financial statements with the SEC. Depending on the amount to be raised, what must be filed varies:

  • If raising $100,000 or less, financials certified by the issuer’s principal executive officer must be filed

  • If raising more than $100,000, independent CPA reviewed financial statements must be filed.

  • If using Regulation CF a second time, and if raising more than $500,000, independent CPA audited financial statements must be filed.

The limit that any individual may invest for all Regulation CF offerings in any 12 month period is (a) the greater of $2,200 or 5% of the lesser of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $107,000; or (b) 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $107,000, if both the investor’s annual income and net worth are equal to or more than $107,000.

  1. For Regulation CF, there is no state-by-state “Blue Sky” pre-approval or registration but companies must file state “notice” filings in states that require those for Regulation CF offerings.

  2. The securities sold are restricted and may not be resold for at least one year.

  3. General solicitation (marketing of the offering) is allowed. However, there are strict limitations on how such marketing may occur, and no pre-offering marketing is allowed.

  4. Founders and other shareholders may not sell their shares in a Regulation CF offering.

  5. Only U.S. companies with a principal place of business in the U.S. may use Regulation CF.

WRITTEN BY Kendall Almerico Securities Attorney