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What are Tier 1 and Tier 2 Regulation A Plus offerings?

What is the difference between Tier 1 and Tier 2 Reg A+ offerings?

Regulation A+ allows for two kinds of offerings, Tier 1, and Tier 2.   

Tier 2 allows companies to raise up to $50 million per year from individual "Main Street" investors, and from accredited investors and institutions worldwide, as does Tier 2. The majority of companies choose Tier 2 because the State by State process of getting Blue Sky exemption is slow and expensive. Companies using Tier 2 do not need to satisfy state registration 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 mill, while Tier 1 ends at $20 mill. That is not the case! Many companies make successful Tier 2 offerings of less than $20 mill. 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;

  • The required upfront audit - (US-GAAP level) that goes back two years. For new startups, the audit is for the period since the company was founded.  
  • The reporting requirements after the offering is completed put some CEOs off. Management financial statements are required 6-monthly and an annual US-GAAP type 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, as does Tier 2. 

With Tier 1, the SEC does not require an audit prior to filing, although this advantage often falls by the wayside because many US States do require an audit for Tier 1.

It is more involved to make a Tier 1 offering because the company raising capital must satisfy the Blue Sky investing regulations of each US State that investors will be accepted from. As a result Tier 1 is generally used by Banks because they often have applicable State exemptions and a local, or single State customer base that they can appeal easily to.

Another challenge with Tier 1 issues 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 good risk. This site lists the State by State filing requirements so you can check your States out.

My recommendations; 

  • If you intend a capital raise of more than $6 million, you will most likely find that marketing your offering to only a few States will not reach a large enoug audience of investors to bring in the needed funds, so you will need to promote your offering to investors all over the USA, and Tier 2 is best. Of course you can only raise a maximum of $20 mill via Tier 1 anyway.
  • If your company has a local-only presence, like a regional bank or a small chain of restaurants that are all in one State, and your customers love your company in a big way, then Tier 1 is probably 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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Timeline schedule for a typical Regulation A+ offering

How much does a Regulation A+ Offering cost?

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