Pricing a Regulation A Offering

Pricing a Regulation A Offering – All Regulation A offerings must be at a fixed price. That is, no offerings may be made “at the market” or for other than a fixed price. Moreover, no part of a Regulation A offering may be variably priced. Accordingly Regulation A cannot be used to qualify shares underlying variably priced derivative securities such as convertible notes or warrants. It could be used if the securities convert at a fixed price.

Regulation A cannot be used for an indirect primary offering. Accordingly, a Regulation A cannot be used for an equity line of credit or ELOC even where the company’s put options are at a fixed price. Though at this time this interpretation is based on SEC staff prerogative and could change without a formal rule change. Any staff interpretation in this regard would hopefully address whether an indirect primary offering, would non-the-less be considered “resale” and therefore limited to 30% of the total amount of securities included in the offering circular.

Since Regulation A is treated as a public offering, broker-dealers acting as placement or marketing agent are required to comply with FINRA Rule 5110 regarding the filing and approval of underwriting compensation.

Securities issued to non-affiliates in a Regulation A offering will be freely tradable. Securities issued to affiliates in a Regulation A offering will be subject to the affiliate resale restrictions in Rule 144, except for a holding period. The same resale restrictions for affiliates and non-affiliates apply to securities registered in a Form S-1.

However, since neither Tier 1 nor Tier 2 Regulation A issuers are subject to the SEC reporting requirements if they only report under Regulation A, the shareholders of companies that were once a shell company at any time in their history, would not be able to rely on Rule 144. Moreover, the twice a year Tier 2 reports would not always constitute reasonably current public information for the support of the use of Rule 144 in the future. Current information under Rule 144 requires information that is no more than 3 months old.

Tier 2 companies that file a Form 8-A and become subject to the Exchange Act reporting requirements may use Rule 144 as can any other Exchange Act reporting company. Also, a Regulation A reporting company can opt to file “quarterly” reports using a form 1-U and thereby maintain current information.

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