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Is a Secondary Market for Regulation A+ Securities?

Is there "really" a secondary market for Regulation A+ securities? In order to answer that, one must consider what exactly does it mean to say "secondary market." in the context of Regulation A+. When thinking of a secondary market, most people think something akin to Wall Street: big floats, and. volatility.

But, in reality, a secondary market for most Regulation A+ will not start at that level. Most Regulation A+ offerings will not start on NASDAQ. What these offerings need, and will have, is a basic infrastructure where investors can reliably find information on a given security, price that security and either sell or purchase that security without the regulatory and contractual impediments associated with other types of exempt securities, such a those from a Regulation D offering.

Let's examine the structure provided by the very recent Regulation A+ rules. There is periodic reporting with mandated informational requirements, including audited financials, the ability of broker-dealers to provide a price quotation for those securities by relying on that reporting, the carve-out to the l 2(g) trigger that requires '34 Act registration for Tier 2 securities so issuers do not need to be concerned about sales of positions increasing their investor counts.

Finally, there is the ability to sell or buy that security without meeting specific regulatory requirements under Rule 144. However, additionally depending on the issuer, periodic reports can be voluntarily filed on a quarterly and annual schedule, which would then make Rule 144 available to that issuer.

Then, there is the issue that blue sky laws are not pre-empted when it comes to secondary activity This fact is not ideal, but it is not fatal. Wholesale preemption of state blue sky laws did not emerge until 1996 with NSMIA. Also, remember that alternative trading systems, like OTCQB and OTCQX, operate daily without preemption from blue sky laws. There are a variety of exemptions under state laws for secondary activity. Forty-two states have adopted some form of the "manual exemption," and nearly every state has iterations of exemptions for secondary activity.

Accordingly there is the ability of investors (note: NOT professional or day traders) to buy and sell Reg A+ securities with the basic infrastructure to do so with confidence. The legal impediments to this kind of secondary activity are relatively low.

The Regulation A+ trading situation may not be ideal, but, at the same time, consider the volatility that has existed on Wall Street. A market this "thin" and new, could not handle similar volatility.

Blue sky regulations may act as a "governor" on volume trading and help to mitigate against volatility that could adversely affect these securities, perhaps in an unduly amplified manner Investors focus, therefore, should be on the fundamentals of these securities rather than market trends.

Further, work needs to be done on the regulatory front to take away some of the lack of clarity that comes with overlapping regulatory regimes. There is a compelling the arguments made by many out there that a greater degree and variety of participation in this market will be necessary in order to keep it meaningful as it grows. But given the nascence of the Regulation A+ market, what exists is workable until professional resources, industry standards and best practices and informational media develop further to sustain a more diversified market.

OTC has already provided their standards and process for listing Reg A+ securities. There is also Alternative Securities Market Exchange (ASMX), based in Los Angeles, which is providing a semi-auction style trading system for Regulation A+ securities.

Yes, there is a secondary market. It is in our power to provide the securities to the marketplace for that market to thrive and grow into what many envision. This is an evolving market.

Is There a Secondary Market for Regulation A+ Securities?


Is there "really" a secondary market for Regulation A+ securities? In order to answer that, one must consider what exactly does it mean to say "secondary market." in the context of Regulation A+. When thinking of a secondary market, most people think something akin to Wall Street: big floats, and. volatility.


But, in reality, a secondary market for most Regulation A+ will not start at that level. Most Regulation A+ offerings will not start on NASDAQ. What these offerings need, and will have, is a basic infrastructure where investors can reliably find information on a given security, price that security and either sell or purchase that security without the regulatory and contractual impediments associated with other types of exempt securities, such a those from a Regulation D offering.


Let's examine the structure provided by the very recent Regulation A+ rules. There is periodic reporting with mandated informational requirements, including audited financials, the ability of broker-dealers to provide a price quotation for those securities by relying on that reporting, the carve-out to the l 2(g) trigger that requires '34 Act registration for Tier 2 securities so issuers do not need to be concerned about sales of positions increasing their investor counts.


Finally, there is the ability to sell or buy that security without meeting specific regulatory requirements under Rule 144. However, additionally depending on the issuer, periodic reports can be voluntarily filed on a quarterly and annual schedule, which would then make Rule 144 available to that issuer.


Then, there is the issue that blue sky laws are not pre-empted when it comes to secondary activity This fact is not ideal, but it is not fatal. Wholesale preemption of state blue sky laws did not emerge until 1996 with NSMIA. Also, remember that alternative trading systems, like OTCQB and OTCQX, operate daily without preemption from blue sky laws. There are a variety of exemptions under state laws for secondary activity. Forty-two states have adopted some form of the "manual exemption," and nearly every state has iterations of exemptions for secondary activity.


Accordingly there is the ability of investors (note: NOT professional or day traders) to buy and sell Reg A+ securities with the basic infrastructure to do so with confidence. The legal impediments to this kind of secondary activity are relatively low.


The Regulation A+ trading situation may not be ideal, but, at the same time, consider the volatility that has existed on Wall Street. A market this "thin" and new, could not handle similar volatility.


Blue sky regulations may act as a "governor" on volume trading and help to mitigate against volatility that could adversely affect these securities, perhaps in an unduly amplified manner Investors focus, therefore, should be on the fundamentals of these securities rather than market trends.


Further, work needs to be done on the regulatory front to take away some of the lack of clarity that comes with overlapping regulatory regimes. There is a compelling the arguments made by many out there that a greater degree and variety of participation in this market will be necessary in order to keep it meaningful as it grows. But given the nascence of the Regulation A+ market, what exists is workable until professional resources, industry standards and best practices and informational media develop further to sustain a more diversified market.


OTC has already provided their standards and process for listing Reg A+ securities. There is also Alternative Securities Market Exchange (ASMX), based in Los Angeles, which is providing a semi-auction style trading system for Regulation A+ securities.


Yes, there is a secondary market. It is in our power to provide the securities to the marketplace for that market to thrive and grow into what many envision. This is an evolving market.


How Long Does It Take to Get a Regulation A+ Offering Qualified and Out Being Sold?


Regulation A offering statement documents must be filed electronically on EDGAR. The Form 1-A consists of three parts: Part I, an XML-based fillable, form with basic issuer information and information requests that will assist the issuer in determining their ability to rely on the exemption; Part II, which will be a text file that will contain the disclosure document (Offering Circular) and financial statements; and, Part III, which will be a text file that will contain exhibits, such as entity governing documents, material contracts, and related materials.

Depending on various factors, including but not limited to the form of business organization of the entity, start-up or seasoned and the comprehensiveness of the business plan, it can take between 30-120 to prepare the documents for filing with the SEC, including the exhibits for filing, and for the auditors to complete the audit.

Once filed on EDGAR, as a completed draft filing, the SEC must review a company's offering documents and audited financials before qualifying the offering to raise money. Some industry observers, including this one, believe that the SEC applies the same level of scrutiny to Reg A+ (Tier 2) offerings as it does to companies preparing for a traditional IPO's.

There has been a concern that, it's takes a long time for a company to get qualified under Reg A+. Some nay sayers of the Reg A+ offering point to Regulation A statistics, from 2012 to 2014, where it took the SEC an average of over 300 days to qualify Regulation A offerings. These statistic are not representative of the new Regulation A+ (Tier 2) offerings because so few Regulation A deals were conducted in that statistical period. Of those offerings that sought qualification under then existing Regulation A in that period, many, if not the vast number of deals, were filed without counsel, or with the assistance of inexperienced practitioners. These statistics also do not take into account the issuers' response time to SEC comments. In that period, many of these issuers would get comments and take weeks, if not months to respond to the SEC. Finally, pre-JOBS Act, the SEC would not qualify an offering until a State review was completed, Accordingly the SEC could finish review quickly but then have to wait for States to be done with their review. There is no state review of a Tier 2 offering.

The reality, is that with a good business plan, a new entity or good auditable books, a client can look for a 90-120 days process from filing to qualification . Deals have qualified in as little as 45 days. In addition to a good business plan, an Issuer needs knowledgeable and responsive counsel and accountants to keep the timing on track.

Also, consider how long it may take to raise capital through a Regulation D, Rule 506 ( c ) offering. Depending on various factors, including but not limited to the form of business organization of the entity, start-up or seasoned, and the comprehensiveness of the business plan, it can take between 30-60 for counsel to prepare the offering documents. Of, course there is no audit. With Reg. D 506 issuers should expect it to take several months to a year to begin to raise meaningful capital. Regulation A+ has a somewhat lengthy process for qualification, but an issuer can market the offering in that review period to a much more diverse crowd of investors. The timing really in not that different.

How Expensive is a Regulation A+ Offering?


How expensive is a Regulation A+ Offering really. That question can be answered in different ways, depending on whether the answer relates to out of pocket dollars to sell to Main Street investors or whether it relates to real costs of venture capital or private equity.

First there are the attorneys fees. At the risk of definitely sounding self-serving, this is not a place to scrimp. Over the years, non-attorney “competitors” and copy cat attorney “competitors” love the word boilerplate. A properly  prepared offering, be it an exempt Reg. D, a Reg A+, or a full S-1 Registration Statement,  by experienced securities counsel, is a great deal of work and is not “boilerplate” uninformed unanalyzed copying.

A Regulation A+ Form 1-A filing is best thought of as a hybrid between a properly prepared Reg D 506 Offering Memorandum and an S-1 Registration Statement for a public offering.

Since the effective date of the new Regulation A+ on June 19, 2015, there have been 112 Regulation A+ offerings filed through July 15, 2016. Reviewing Part 1, of Form 1-A for Attorneys fees for the offering, shows a wide range from $7,500 - $330,000. A fine tuned look at these fees reveals that the “big firms” are charging between $225,000 and $330,000. Experienced practitioners, not with “big firms,” are charging between $30,000 and $100,000. At the lower end price, there is typically a point or two in back end fees paid by the raise itself or there is 2-5 % equity interest in the form of Warrants, or both.

There are also attorneys fees and fees associated with the Blue Sky filings. Since Tier 2 is pre-empted from state regulation, these are filings and the costs of these filings are  typically much the same as the NSMIA pre-empted filings for Reg. D 506. The state Blue Sky filing fees range from zero to as much as $2,300 but are typically about $300 per state. Attorneys fees, seen on Part 1 of Form 1-A, associated with these filings, range from $10,000 to $75,000 for all 50 states: but again, these numbers reflect the difference between experienced practitioners, not with big firms, and big firm legal work.

A review of the Accounting Fees listed on Part 1 of Form 1-A range generally from $6,000 to $380,000. Typically, a newly formed entity with little or no business history can be audited for about $6,000. As to the fees ranging up from there, it is hard to gauge what it actually represents. Higher fees could mean a “big firm” audit but they could also mean that it was an audit of an operating company, that had never been audited before, that was perhaps without a good internal accounting system. In any event, remember that this is not a PCAOB audit but merely a GAAP audit which is formidable enough. The average figure appear to be $12,00 to $30,000. Auditors are not allowed to take back-end fees.

As to the broker-dealer and other promotional costs, these are a little less easy to predict and of course, negotiable. Most reputable broker dealers will want at least $25,000 to start their due diligence. Whether and how much it goes up from there will depend on the nature of the offering and the selling campaign. Broker dealer due diligence is a kicking of the tires and most likely will involve an investigation into the Bad Boy issues and verification of the bona fides of the issuer. Plan for $40,000 to $100,000 and this is not sales commissions which are typically 5-10% of the offering amount raised.

Last, in reviewing  the costs discussed above, consider that these are the costs to sell the offering to Main Street, which is a broader market pool than the reasonably verified accredited investor of Reg. D 506(c) and certainly a much broader market pool that the Venture Capital/Private Equity sector seeking only Unicorns.. The reasonableness of these costs should be considered in light of what the Unicorn Hunters want for making their investment.

For Venture Capital and Private Equity, a Company needs to consider the cost of negotiating with such an investors, not just the attorneys fees associated with the negotiation, but the reality associated with what must be given up in equity and control to obtain their capital. One must consider the economic value of a company having the ability to set the terms of its offering to a broader public versus having the terms dictated to the company by institutional capital.

Also consider the true cost and the true economic value to the company using a Regulation A+ offering to grow the company in light of the difficulty or impossibility of getting through the Venture Capital bottle neck or trying to compete at the roulette wheel represented by the more limited pool of accredited investors. Once one analyzes the size of the investing audience allowed under Regulation A+ and the opportunities available, the dollar costs discussed above look a lot more reasonable