This article is from the Investing Articles: Public Offerings: IPO and DPO series.
Regulation A Offering Process.
Regulation A promulgated by the SEC allows the public issuance of securities without registration with the SEC. In the stead of registration, Regulation A requires that an "offering statement" be filed with the SEC. After the offering statement has been filed, then oral and certain limited written offers and advertisements may be made (i.e., "red herrings" may be circulated), but no sales may be consummated. After the offering statement has been "qualified" by the SEC, then other written offers and advertisements may be made and sales may be closed. The offering statement contains an "offering circular", which is the actual disclosure document given to investors. Regulation A allows an issuer to choose one of several formats for preparing the offering circular. The simplest format is virtually identical to Form U-7 used for SCOR offerings. Other formats more closely resemble a prospectus used in connection with the Form SB-2 registration statement.
Test the Waters.
Regulation A also contains a "test the waters" provision. An issuer may publish or deliver to prospective purchasers a written document or a scripted radio or television broadcast to determine whether there is any interest in a contemplated securities offering. No oral communication is permitted with potential investors until after the written document or script has been submitted to the SEC. No sale may be made until after 20 days have elapsed and the prospective purchaser has been furnished with the offering circular. Thus an issuer may "test the waters" prior to incurring the expense of actually preparing the offering statement.
The issuer must provide financial statements prepared in accordance with GAAP; however, the financial statements need not be audited, unless the issuer prepares audited financial statements for other purposes; then audited statements must be furnished. Although Regulation A does not generally require audited financial statements, investors are generally more receptive to an offering if the financial statements have been audited.
Comparison with a Registered Offering.
Although the Regulation A procedures appears in many ways to be analogous to a registered offering, it is intended to be and is generally less burdensome than a traditional registered offering.
Blue Sky and NASD Review.
A Regulation A offering must also be registered in the various states under their respective "blue sky laws". Many states allow for registration by coordination for Regulation A offerings, which is generally less burdensome than registration by "qualification". However, each state's law must be examined to determine individual requirements. The terms of the underwriting must be cleared by the NASD.
An issuer should assume that the due diligence and preparation of an offering statement will take two-three weeks and that the SEC will take four-six weeks to completely process and qualify an offering statement. This time frame assumes that the issuer, the underwriter, the attorneys, and the accountants are all prompt in completing their various tasks.
Eligibility and Amount Raised.
Generally Regulation A is available only to non-public companies. It may be used to raise up to $5 million in any 12 month period, only $1.5 million of which may come from selling shareholders.