Table of Contents
SERIES 7 PREP | FINANCIAL REGULATION COURSES
Regulation A is an exemption from the full registration requirements of Section 5 of the Securities Act of 1933 that allows companies to offer and sell securities to the public — including to non-accredited retail investors — through a streamlined disclosure process substantially less burdensome than a traditional registered initial public offering, up to specified annual dollar limits. Authorised under Section 3(b) of the Securities Act and substantially expanded by Title IV of the Jumpstart Our Business Startups Act of 2012, Regulation A is commonly referred to as a mini-IPO because it permits genuinely public offerings — broadly advertised, open to all investors — without the full registration apparatus of a conventional IPO. The SEC's final rules implementing the JOBS Act expansion — adopted on March 25, 2015 and effective June 19, 2015 — are commonly called Regulation A-plus, and they established the two-tier framework that governs the programme today.
Regulation A derives its authority from Section 3(b) of the Securities Act of 1933, which grants the SEC authority to exempt from the full registration requirements of Section 5 any class of securities if it finds that the enforcement of the registration requirements with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering. This provision recognises that the compliance burden of a full Section 5 registration — filing a registration statement, waiting through an SEC review period, and delivering a Section 10(a) statutory prospectus — is disproportionate for smaller capital raises where the investor population, offering size, and associated risk do not justify the full cost and complexity.
The original Regulation A exemption, as it existed before the JOBS Act, was capped at five million dollars annually — an amount widely regarded as insufficient to justify the cost of preparing and qualifying the required offering documentation — and required state-by-state registration that further increased costs and complexity. Usage was minimal. Title IV of the JOBS Act directed the SEC to expand the exemption substantially, and the resulting Regulation A-plus framework created two tiers with meaningfully higher offering limits and a federal preemption of state registration requirements for the larger tier.
Regulation A operates through two distinct tiers — Tier 1 and Tier 2 — each with different offering limits, disclosure requirements, investor eligibility rules, ongoing reporting obligations, and state securities law treatment.
Tier 1 — Up to Twenty Million Dollars
Tier 1 permits offerings of up to twenty million dollars in any twelve-month period, including no more than six million dollars on behalf of selling securityholders that are affiliates of the issuer. Tier 1 imposes no limitation on which investors may participate — retail investors of any income or net worth level may invest without restriction on the amount they invest in a single Tier 1 offering.
Tier 1 issuers are not required to include audited financial statements in their offering documents unless they have already prepared them for other purposes. This lighter financial statement requirement reduces costs but also reduces the information available to investors for evaluating the offering.
Tier 1 offerings are subject to state securities law requirements — so-called blue sky laws — in each state where the securities are offered or sold. This means Tier 1 issuers must comply with the registration or qualification requirements of every state securities regulator whose jurisdiction is implicated by the offering, substantially increasing the regulatory burden and limiting the practical attractiveness of Tier 1 for multi-state offerings.
Tier 1 issuers have no ongoing periodic reporting obligations to the SEC after completing the offering, although they must file a final report on Form 1-Z within thirty calendar days after the offering is completed or terminated.
Tier 2 — Up to Seventy-Five Million Dollars
Tier 2 permits offerings of up to seventy-five million dollars in any twelve-month period — raised from fifty million dollars when the SEC amended the rules in March 2021 — including no more than twenty-two point five million dollars on behalf of selling securityholders that are affiliates of the issuer. Sales by all selling securityholders in a Tier 2 offering are limited to no more than thirty percent of the total offering.
Tier 2 imposes an investment limitation on non-accredited investors — individual investors who are not accredited under Rule 501(a) of Regulation D may not invest more than ten percent of the greater of their annual income or net worth in any single Tier 2 offering, calculated excluding the value of the investor's primary residence and any loans secured by it. This investment cap does not apply to accredited investors or to securities that will be listed on a national securities exchange upon qualification — exchange-listed Tier 2 securities are freely purchasable by all investors without limitation.
Tier 2 issuers must include audited financial statements prepared by an independent accountant in their offering documents. The Tier 2 offering circular is reviewed and qualified by the SEC Division of Corporation Finance but — unlike Tier 1 — is not subject to review or qualification by state securities regulators. This federal preemption of state blue sky review for Tier 2 offerings is the most significant practical advantage of Tier 2 over Tier 1 for companies seeking to offer securities in multiple states, as it eliminates the state-by-state registration burden.
Tier 2 issuers are subject to ongoing periodic reporting obligations after completing or terminating the offering. They must file annual reports on Form 1-K within one hundred and twenty days of fiscal year-end, semiannual reports on Form 1-SA within ninety days of the end of the first six months of the fiscal year, and current reports on Form 1-U within four business days of specified material events. These reporting requirements are less extensive than the full SEC reporting obligations of Exchange Act reporting companies — Tier 2 issuers file with the SEC but are not SEC reporting companies under the Exchange Act unless they separately trigger Exchange Act registration. A Tier 2 issuer may suspend its ongoing Regulation A reporting obligations after completing reporting for the fiscal year in which the offering concluded if it meets specified conditions.
Both Tier 1 and Tier 2 companies must file an offering statement on Form 1-A with the SEC before conducting a Regulation A offering. The Form 1-A contains the offering circular — the primary disclosure document for investors, functioning as the Regulation A equivalent of a prospectus in a registered offering — plus supplementary information about the offering structure.
The offering circular must include a description of the company's business, risk factors, use of proceeds, financial statements meeting the applicable tier requirements, management biographical information and compensation, related party transactions, and the terms of the securities being offered. The SEC reviews the Form 1-A and may issue comments requiring revisions before qualifying the offering — meaning formally declaring that the offering may proceed. Companies may not accept payment for the sale of securities until their offering statement has been qualified by the SEC.
No SEC filing fee is required for Regulation A offerings — a meaningful cost saving compared to registered offerings whose filing fees are calculated as a percentage of the offering's aggregate offering price.
A distinctive and practically important feature of Regulation A is the testing the waters provision — companies may solicit non-binding indications of interest from the general public before or after filing the offering statement, subject to certain conditions. This pre-qualification solicitation allows issuers to gauge genuine investor demand before committing to the full cost of preparing and qualifying the Form 1-A. Testing the waters communications must be filed with the SEC and must comply with specified antifraud requirements — they may not be materially misleading — but they may be broadly disseminated through social media, email, and other communications channels.
Regulation A is available only to companies organised in and with their principal place of business in the United States or Canada. Certain categories of issuers are explicitly excluded from Regulation A eligibility — Exchange Act reporting companies, investment companies registered under the Investment Company Act of 1940, blank check companies, companies subject to ongoing reporting obligations as a result of a prior Regulation A offering that is still active, and companies that are disqualified due to bad actor provisions under Rule 262, which bars issuers with certain prior regulatory violations or criminal convictions from using the exemption.
Regulation A and Regulation D are the two primary federal exemptions from full Securities Act registration used by smaller companies, but they serve fundamentally different capital markets purposes and attract different investor populations.
Regulation D under Rules 506(b) and 506(c) permits unlimited capital raises from accredited investors — typically institutions and high-net-worth individuals meeting specified income or net worth thresholds — without SEC qualification review of the offering materials, without ongoing reporting requirements, and without any investment limitation on accredited investors. Regulation D offerings are private — securities sold under Rule 506 are restricted and cannot be freely resold without registration or an applicable exemption.
Regulation A permits genuinely public offerings — sold to any investor, broadly advertised, with freely tradeable securities — but imposes meaningful caps on the total offering size and requires SEC qualification of the offering materials. Regulation A securities sold in a Tier 2 offering are not restricted securities and may be freely resold by purchasers immediately after the offering — a critical distinction from Regulation D securities which require a holding period before resale.
The practical implication is that Regulation A is most useful for companies that want broad retail investor participation, desire freely tradeable securities from the outset, and are willing to accept the SEC qualification process and, for Tier 2, ongoing reporting obligations in exchange for access to the general investing public. Regulation D is more appropriate for private placements to sophisticated institutional investors where the offering speed, privacy, and absence of investment limitations outweigh the advantages of retail accessibility.
Regulation A is tested on the Series 7 examination in the context of Securities Act exemptions, the capital-raising alternatives available to smaller companies, and the distinction between public and private offerings.
The key points to retain are these.
Regulation A is an exemption from full Securities Act Section 5 registration authorised under Section 3(b) of the Securities Act, expanded by Title IV of the JOBS Act of 2012 into the two-tier Regulation A-plus framework with SEC final rules adopted March 25, 2015. Tier 1 permits offerings up to twenty million dollars in any twelve-month period — no audited financials required, no ongoing reporting after the offering, subject to state blue sky law review, no investor investment limitations. Tier 2 permits offerings up to seventy-five million dollars in any twelve-month period — audited financials required, ongoing reporting on Forms 1-K, 1-SA, and 1-U required, state blue sky preemption for the offering, non-accredited investors limited to ten percent of the greater of annual income or net worth per offering.
Both tiers require filing an offering statement on Form 1-A with the SEC — no offering proceeds may be accepted until the SEC qualifies the offering. Testing the waters — soliciting non-binding indications of interest before or after filing — is permitted under both tiers subject to antifraud requirements. Regulation A securities sold in a Tier 2 offering are not restricted securities and may be freely resold immediately — distinguishing them from Regulation D securities which carry holding period restrictions before resale. Regulation A is available only to US and Canadian issuers and excludes Exchange Act reporting companies, registered investment companies, blank check companies, and bad actor disqualified issuers under Rule 262. No filing fee is required for Regulation A offerings.
