THE REGULATION A REGISTRATION EXEMPTION FOR SMALL SECURITIES OFFERINGS

Under section 3(b) of the Securities Act of 1933, the Securities and Exchange Commission has established Regulation A to exempt small offerings of securities from registration requirements. While the exemption does not relieve a company from its obligation not to use false or misleading statements or from state law requirements, Regulation A allows companies to issue and sell securities with less burden and expense than normally required.

 

Under Regulation A, public offerings of securities that do not exceed $5 million in any 12-month period are exempted from registration requirements for a proxy statement and other materials to be reviewed by the Securities and Exchange Commission. However, a company making an offering of less than $5 million still is required to file an offering statement with the Commission for its review. The offering statement contains a notification, an offering circular, and several exhibits.

 

 

The offering circular is similar to a prospectus and it must be provided to prospective purchasers. However, financial statements in the offering circular, in contrast to those in a prospectus, do not have to be audited by a certified public accountant.

 

 

Stock purchased from a company pursuant to a Regulation A exemption from normal registration requirements is freely transferable. There are no restrictions on further sale of the stock. Another advantage of a Regulation A offering is that if the offering company continues to be a small company after the offering — that is, it does not have more than $10 million in total assets or more than 500 shareholders — there are no further Securities Exchange Act reporting requirements as there are for other securities.

 

 

The offering circular to be reviewed by the Securities and Exchange Commission staff may be prepared in one of three formats. One of the formats is a simplified question and answer document. Thus, the offering circular not only needs less information than the normal registration statement but also is easier to complete.

 

 

The Securities and Exchange Commission allows companies to “test the water” to determine if an offering pursuant to Regulation A will be successful. Thus, a company may advertise a prospective offering prior to filing an offering statement with the Commission and prior to incurring the expense of legal and accounting services connected with filing an offering statement. If the company finds that there is sufficient interest in its offering, it must then provide the Commission staff with an offering statement which in turn must be delivered to investors following staff review and prior to any acceptance by the company of money for the stock in the offering.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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