Here we describe how Tier 1 and Tier 2 Reg A+ offerings are different.
Regulation A+ allows for two kinds of offerings, Tier 1 and Tier 2.
Tier 2 allows companies to raise up to $75 million per year from individual "Main Street" investors, accredited investors, and institutions worldwide. The majority of companies choose Tier 2 because the Tier 1 requirement to obtain State by State Blue Sky exemption is very slow and very expensive. Companies using Tier 2 do not need to satisfy state Blue Sky requirements to raise capital (with some exceptions). Note that Tier 2 starts from a zero minimum for SEC purposes - I say this because there is a popular misconception that Tier 2 starts at $20 million. That is not the case! Many companies make successful Tier 2 offerings of less than $20 million.
As a separate note, I recommend that you only use Reg A+ for raises of more than $4 mill because of the time and costs involved.
How Tier 2 is more challenging than Tier 1;
- The required upfront audit - (US-GAAP level) that goes back up to two years. For new startups, the audit is for the period since the company was started. Many Tier 1 offering companies end up being required by States to provide audited financials, so this one is often moot.
- The reporting requirements after the offering put some CEOs off. Management financial statements are required 6-monthly and an annual US-GAAP audit.
Tier 1 permits capital raises of up to $20 million per year from individual "Main Street" investors, and of course, from accredited investors and institutions worldwide.
With Tier 1, the SEC does not require an audit before filing. However, this advantage often falls by the wayside because many US States require audited financials for Tier 1 to satisfy their process. Another potential advantage for Tier 1 is that your company is not required by the SEC to provide an annual audit after you complete your raise.
It is more involved to make a Tier 1 offering because you must satisfy the Blue Sky investing regulations of each US State that you accept investors from. As a result, Tier 1 is generally used by Banks because they often have available State exemptions and a local customer base that they can appeal to easily.
Another challenge with Tier 1 Reg A+ offerings is that some States are slow and unpredictable in how they process filings, and some are very demanding and have high hurdles to gain acceptance. California, for example, applies Merit Review in which the State decides if a company offering is a low enough risk for their residents. One securities attorney that completed a Tier 1 offering that filed in almost all US States told me she would never do it again because it was so slow and expensive to get through the States processes. This site lists the State by State filing requirements so you can check your States out.
How does having a broker-dealer affect your choice?
Having a broker-dealer gets you easier access to the investors in the US States that are not cooperating with the SEC – the biggest being Texas and Florida. This is true in Tier 1 and in Tier 2 and is not related to Blue Sky filings. If you are based in Florida, I recommend that you get a broker-dealer in either case because this State is more restrictive on companies based there.
- If you intend a substantial capital raise, you may find that marketing your offering in only a few States will be too limiting, so you will need to promote your offering to investors all over the USA, and Tier 2 is best.
- If your company has a strong local presence, and your customers love your company in a big way, then Tier 1 is maybe a better fit as long as you can live with it's $20 million maximum raise cap.
- Note that out of the total capital raised via Reg A+, Tier 1 accounted for 15% of the 2018 total ($100 mill out of $660 mill), while Tier 2 delivered 85% of the capital - $560 mill. That is a pretty dominant share.
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