Reg A+ Tier 2 Offerings Preempt State Law
Tier 2 offerings present a much needed opportunity for smaller companies to go public without the added time and expense of state blue sky compliance but with added investor qualifications. That is, and as I’ve mentioned many times previously, Tier 2 offerings preempt state law.
In addition to the basic requirements that will apply to all Regulation A+ offerings, Tier 2 offerings will require audited financial statements (though I note that state blue sky laws almost unilaterally require audited financial statements, so this federal distinction may not have a great deal of practical effect);
Tier 2 offerings will also require ongoing reporting requirements including the filing of an annual and semiannual report and periodic reports for current information
Tier 2 offerings have a limitation on the amount of securities non-accredited investors can purchase of no more than 10% of the greater of the investor’s annual income or net worth. It is the obligation of the issuer to notify investors of these limitations. Issuers may rely on the investors’ representations as to accreditation and investment limits with no added verification.
The ultimate benefit is that Tier 2 issuers that have used the S-1 format for their Form 1-A filing will be permitted to file a Form 8-A to register under the Exchange Act and become subject to its reporting requirements. A Form 8-A is a simple registration form used instead of a Form 10 for issuers that have already filed the substantive Form 10 information with the SEC. Upon filing a Form 8-A, the issuer will become subject to the full Exchange Act reporting obligations, and the scaled-down Regulation A+ reporting will automatically be suspended. With the filing of a Form 8-A the issuer can apply to trade on a national exchange. When the securities will be listed on a national exchange, the accredited investor limitations will not apply.
This marks a huge change and opportunity for companies that wish to go public directly and raise less than $50 million dollars. Details determine diligence, so remember that an initial or direct public offering on Form S-1 does not pre-empt state law. By choosing a Tier 2 Reg A+ offering followed by a Form 8-A, the issuer can achieve the same result – i.e. become a fully reporting trading public company, without the added time and expense of complying with state blue sky laws. The other consideration being the added investor qualifications, but if the issuer meets the requirements for and lists on a national exchange, the added investor qualifications no longer apply.
Finally, effective July 10, the OTCQB has amended their rules to allow a Tier 2 reporting entity to qualify to apply for and trade on the OTCQB – however, unless the issuer has filed a Form 8-A or Form 10, they will not be considered “subject to the Exchange Act reporting requirements” for purposes of benefitting from the shorter 6 month rule 144 holding period.