Regulation A+: What Life Science CEOs Need to Know

19 Nov

By Nicholas Civitarese, Research Analyst, LSN


Keeping up with the trends and changes of the investor landscape is no easy task. For fundraising companies, however, being familiar with the rules and regulations of raising capital is an important component of the process. On March 25, 2015, the Securities and Exchange Commission adopted a significant amendment to Regulation A in accordance with Section 401(a) of the JOBS Act. Having been largely ignored by most fundraising companies, with these changes Regulation A could become a viable alternative for those who can’t meet the costs or size requirements of an IPO.

Here’s what you need to know about the updated law.

Previously, fundraising companies could raise no more than $5 million in a 12-month period and were forced to comply with each individual state’s “blue sky laws.” These laws are designed to protect investors against securities fraud and require issuers to verify their financial data and register their offerings with each state in which the company is looking to raise funds. However, because each state has its own small but equally important stipulations, this can be a confusing, expensive, and time-consuming process for companies raising funds across multiple states.

Unlike Regulation D, which provides companies with a uniform code to follow because the securities are backed by the National Securities Markets Improvement Act, Regulation A relies on state regulators. State regulators are geographically close (and therefore accessible) to these investors and are also familiar with local economic factors. Thus, they’re considered to be in a better position than the SEC to protect investors when dealing with these types of offerings.

Previously, the low limit of funds ($5 million) that could be raised, in combination with having to adhere to each state’s unique laws, made Regulation A widely unpopular. But the updated version, or “Regulation A+” as it is frequently called, has been expanded to include two different tiers and reduces the involvement of state regulators.

Regulation A+ now allows issuers to sell securities to an unlimited number of non-accredited investors, provided they abide by a few stipulations. These stipulations vary depending on which tier the issuer chooses. Tier 1 is similar to the old Regulation A, while Tier 2 is the expanded offering. The changes have been summarized below.

Both Tiers

  • Issuers are no longer limited to accredited investors – friends, family, and everyone in between is allowed to invest. Tier 2 prevents an investor from contributing more than 10% of their net worth.
  • There is no longer a limit to the number of people that can make investments – therefore opening up the market to people of all income levels and creating the potential for many smaller investments.
  • Unlike Rule 506(c) under the JOBS Act, Investors (not issuers) are now able to self-certify their net worth for the purposes of investment limits. Documentation is no longer required.
  • Issuers are allowed to advertise and solicit their offering in any manner they see fit. This includes demo days, television commercials, social media, radio, or word of mouth.
  • The issuer must file a disclosure document and their financials with the SEC and have them approved prior to making any sales. This “offering circular” will receive the same level of scrutiny as a Form S-1 in an IPO.
  • Issuers are allowed to “test the waters” and see if there is an interest or market for their offering. This is useful for those who are afraid to gamble on fundraising expenses, such as the legal and accounting fees needed to create an “offering circular.”
  • All securities issued are unrestricted and freely transferable; however, some issuers may choose to impose contractual limits to these transfers.
  • Investment companies are NOT allowed to use Regulation A to raise capital.

Tier 1 – Similar to the old Regulation A

  • Tier 1 issuers are still subject to state registration and qualification.
  • They may raise up to $20,000,000 in a 12-month period.
  • There can be no more than $6 million in secondary sales by affiliates, and they are limited to less than 30% of the total offerings for the first 12 months.
  • The issuer must have their financials reviewed (not audited) by the SEC, in combination with the “offering circular.”

Tier 2

  • May raise up to $50,000,000 in a 12-month period.
  • Secondary sales by affiliates are limited to $15 million and to less than 30% of the total offerings for the first 12 months.
  • Individual, non-accredited investors can only invest a maximum 10% of their net worth per Regulation A offering.
  • The issuer is required to provide two years of AUDITED financial statements to the SEC, in combination with the “offering circular.”
  • The issuer is required to create an annual disclosure filing, a semi-annual report, and a current report. These reports will require ongoing audited financials and are toned-down versions of a Form 10-K, Form 10-Q, and Form 8-K. The issuer is allowed to terminate these disclosures if the shareholder count drops below 300.
  • The issuer is NOT required to abide by a state’s blue sky laws. This is a major advantage over Tier 1 because those issuers are required to register their securities in every state where they make an offer or sale. This benefit may be extended to Tier 1 in the future, depending on a review by the North American Securities Administrators Association.

With possible investments coming from a multitude of sources—such as venture capital, angel investors, and family offices—the changes made to Regulation A could make this one more tool in the toolbox for raising capital. LSN looks forward to updating our readership on further developments in the life science fundraising landscape.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: