How to exempt an ICO from US Securities Laws with Regulation A+

After reviewing all of the possible options of exemption, it appears the best and only practical option to run a legally operating ICO is by filing to be qualified as a Reg. A+ Teir 1 Security Offering. Further, this will set us apart as one of the very few ERC 20 tokens to be legally compliant with the SEC.

Moreover, by following the proper steps of compliance, we may be able to list our ERC20 token on the NYSE or other Federal exchanges, along with being listed on decentralized exchanges, without ever needing to fear a court subpoena from the SEC. I’ve put together little bit of info about previous court cases with the SEC regarding unregistered security sales.

Intro Regulation A+

For more than eight decades, the Securities Act of 1933 has protected investors by requiring full disclosure in initial public offerings. As President Roosevelt explained at the time of its enactment, the statute was intended to restore confidence in public markets by ensuring that important information regarding new issues was not “concealed from the buying public.”

In 2012, the Jumpstart Our Business Startups (JOBS) Act created a new type of offering that largely bypassed these investor protections. Commonly known as a mini- IPO or Regulation A+ offering, the provision allowed small companies to raise $20 mil(TIER 1) $50 mil(TIER 2) or less with limited regula­tions.

Regulation A+ companies go through only a minimal “qualification” process, avoiding most pre-offering scrutiny from the SEC’s Division of Corporate Finance. Such com­panies are not bound by the “quiet period” rules that restrict advertising of traditional IPOs. Regulation A+ has become a “backdoor” mechanism to facilitate public listings by companies that would not be able to do so by traditional means

Predictably, the reduced scrutiny of Regulation A+ has attracted promoters with shady pedigrees. For example, the CEO of Level Brands, Martin Sumichrast, was previously known for bringing low-quality companies public through Stratton Oakmont, the infamous penny-stock brokerage featured in Wolf of Wall Street.

KEY POINTS

• Reg A+ enables a company to sell tokens and investors to receive tokens while the company remains safely within the bounds of the U.S. securities laws
• Regulation A+, introduced in 2017 as a way to go public, is fast becoming a valuable capital raising tool for emerging companies.
• It offers a shorter timetable than a traditional IPO and is less burdensome from a regulatory standpoint.
• Regulation A+ is also well-positioned to provide companies with an efficient way to sell tradeable security tokens in the future.

Advantages of Regulation A+

Regulation A+ provides compelling advantages for companies with a strong user base and clear value proposition that are seeking to raise capital, including:

• companies can obtain a public listing, which crowdfunding does not provide
• purchasers of Regulation A+ securities may immediately resell them, as they are not restricted
• audited financials are not required in a Tier 1 offering and there are no reporting requirements after a Tier 1 offering except for an exit report
• companies can offer shares to a broad range of purchasers, including both accredited and non-accredited investors, which enables a company to involve its own customers and use its own ecosystem for the offering
• companies can engage in public advertising campaigns, including to its own customers, to market and promote the offering, which is not allowed in a traditional IPO or private placement
• the SEC wants to encourage Regulation A+ filings and is said to be highly efficient and responsive to Regulation A+ filers
• may be quicker than traditional equity capital raisings, and
• legal, accounting and other professional service costs may be lower for a Regulation A+ offering.
• no required minimum capital raise goal (unless listing on NASDAQ or NYSE)
• rotal issuer process can take up to 20 weeks

Token Sales/ICOs and Regulation A+

Regulation A+ offering is an SEC-approved mechanism for raising equity capital, and is best used by companies with a strong user base, it provides a viable mechanism by which companies can do a token sale. If a company sold security tokens, the company could execute a Regulation A+ offering of securities, and each security would be issued in the form of a token. This would enable a company to sell tokens and investors to receive tokens while the company remains safely within the bounds of the U.S. securities laws. In addition, the tokens issued in a Regulation A+ security token offering may be able to be freely traded on an alternative trading system (ATS). ATS platforms that can trade security tokens are currently under development and it is expected that such platforms will become available later this year.

Similar to an IPO, a Reg A offering can act as a liquidity event for earlier stage investors. This “secondary sales” process allows for up to 30 percent of the securities sold during a raise to come from current security holders.

Reporting Obligations

Companies that would like to file under Regulation A+ must submit a Form 1-A to the SEC, receive SEC qualification and satisfy the requirements of their selected tier. Companies whose securities have not previously been sold under Regulation A+ or an effective registration statement may submit a Form 1-A confidentially, but the document must be publicly filed no less than 21 days before SEC qualification.

Once a company has filed its Form 1-A and completed its equity offering, its ongoing SEC reporting obligations differ based on which Regulation A+ tier it used for the offering. Tier 1 companies have no ongoing reporting obligations, aside from the filing of a Form 1-Z exit report within 30 calendar days after the termination or completion of an offering. The Form 1-Z requires companies to report, among other things, the amount of securities sold, the names of the underwriters, any fees received by the underwriters and the net proceeds for the issuer.

Tier 1 vs Tier 2 Filing

Regulation A+ provides for two tiers of offerings (Tier 1 and Tier 2) that allow smaller companies to go public on a national securities exchange, such as NYSE or NASDAQ, without having to follow the more rigorous IPO process.

Regulation A+ offering characteristics are summarized in Table 2. Equity offerings accounted for the majority of offerings (87% of all offerings and 90% of qualified offerings).

Tier Requirements

Tier 1 Requirements:

• The company must be organized under the laws of the U.S. or Canada
• The company can raise up to $20 million in any 12-month period
• Companies that want to raise up to $20 million can elect either Tier 1
• Not more than $6 million can consist of sales by affiliates of the issuer (such as insiders)
• Anyone is permitted to participate and invest
• Public advertising (oral, written or solicitations of interest) is permitted
• The company’s financial statements do not have to be audited
• The company must register or qualify the offering under the applicable “blue sky law” in any state in which the company seeks to offer or sell securities. Blue sky law by state

Listing on Stock Exchanges

Not all Reg A issuers list their offerings on exchanges, but for those that have sufficient resources to accommodate the extra costs and administrative burden, it can serve as an effective means to gain more market exposure.

If a company chooses to list on a national exchange, the company would also be subject to the relevant rules of that exchange. In addition to listing on a national securities exchange, companies also have the option of being publicly listed on the over-the-counter(decentralized) markets, which have less burdensome requirements than the national securities exchanges.

Finally, continuous or delayed offerings may be conducted for up to 3 years since the initial qualification date, after which a new offering statement must be filed and qualified. Approximately 54% of all offerings and 65% of qualified offerings involved offerings on a delayed or continuous basis.

Continuous offerings give issuers more flexibility in extending the offering based on market conditions and issuer financing needs, without having to incur the cost and time of initiating and completing a new qualification process. Issuers in continuous offerings are able to file offering circular supplements in lieu of amendments for certain changes, which results in potentially greater flexibility of the offering process.

Other types of exempt offerings

The following chart displays the 4 options for companies who want to hold a public offering to sell unregistered securities.

Regulation A+ represents only one out of many capital raising methods, and only one type of offerings of securities that are exempt from registration under the Securities Act.61 It is therefore possible that issuers utilize Regulation A+ in conjunction with other exempt offering activity. The majority, 61% of issuers (73% of issuers in qualified offerings) report having recently undertaken unregistered offerings of securities.

Looking at the types of recent unregistered offerings reported by Regulation A issuers, among issuers reporting prior unregistered offering activity, most have conducted placements in reliance on Section 4(a)(2) (statutory exemption from the registration requirements of Section 5 of the Securities Act of 1933 for “transactions by an issuer not involving any public offering”) or Regulation D (a nonexclusive safe harbor that defines sufficient conditions for an offering to be considered a private offering, e.g., under Rules 504, 505, 506(b) or 506(c) of Regulation D62). Some have previously conducted Regulation A offerings or offerings under Rule 701.63

Regulation A vs Regulation D 506 b & 506 c

Two major benefits to Reg D over Reg A are the ability to raise capital without a maximum limitation and the eligibility of SEC-registered companies to participate in the exemption. Reg A is limited to U.S. and Canadian companies that have not previously registered with the SEC. Although, that may be changing soon.

But the primary difference between Regulation A and private offerings under Regulation D is the eligibility of non-accredited investors. While 506 b does allow for up to 35 non-accredited investors in an offering, it is forbidden to market those securities online to potential investors. 506 c, does not allow unaccredited investors, but can be marketed online via the “general solicitation” rule, bringing it more in line with Reg A. Regulation A is marketable to all investors, regardless of channel.

Regulation A vs Crowdfunding (Regulation CF)

It is a common misconception that because Reg A is marketable to any and all investors, it is crowdfunding. However, there are some significant differences between Reg A and true crowdfunding under Regulation CF. Because of the lower capital raise limit, companies utilizing Reg CF tend to have lower valuations and be in earlier developmental phases. Reg A is for more established companies looking to use the capital for growth. Regulation CF also requires that the offering be listed on a registered funding portal. Acceptance into these portals can be highly competitive, with some accepting as few as 1% of applicants. No such requirements exist for Reg A offerings, though some portals do exist to help with listing and subscription, as does the option to list on national stock exchanges such as OTC, NASDAQ, and NYSE.

Regulation A vs IPO

Though Reg A is an exemption from federal registration requirements like private capital raise exemptions Regulation D and CF, Reg A actually has more in common with a traditional IPO. Because it is open to all investors and because in some cases securities can even be resold or traded, Reg A offerings are considered public offerings.

A traditional IPO is designed for large companies with the capital needed to cover the legal and accounting costs associated with going public. Reg A opens up the door for smaller companies to do the same, including the ability to list Tier 2 offerings on securities exchanges like NASDAQ or NYSE or even OTC. For this reason, a Tier 2 offering is sometimes called a “Mini-IPO.”

Generally, Reg A offerings advance through the “regulatory pipeline” faster than standard IPOs. The SEC has estimated that Reg A deals historically take an average of 78 days to be approved.

This is an advantage as traditional IPOs may take 90 to 180 days to be approved and can carry significant costs. Listing with Reg A can result in a shortened timeline for Reg A offerings, as well as lower upfront costs and legal fees. However that is not to say that listing through Reg A is inexpensive. To be listed on stock exchanges, additional SEC reporting requirements, such as registering as an Exchange Act reporting company, must be complied with, which may result in increased costs.

Many small or emerging businesses involved in Reg A offerings have successfully raised funds without listing on any major stock exchanges, keeping costs low. But, the lack of a trading market will likely increase the difficulty for current shareholders of these companies to sell their shares in the future. Listing on an exchange may help attract investors that are looking for a more liquid investment than is offered by non-traded securities.

Conclusion

Regulation A+ has a limited history, but the recent experiences of companies that have gone public using Regulation A+ show that it is quickly becoming a valuable and viable tool for capital raising. It is less burdensome and requires a shorter timetable than a traditional IPO, but provides the same benefits of significant public equity capital raising and potentially a public trading market. These benefits of Regulation A+ may also be particularly valuable to companies considering an ICO or a token sale, as it may provide those companies with an efficient way to sell tradeable security tokens.