The cannabis industry is booming, and will almost certainly be the next billion dollar “green” industry. However, marijuana companies, especially start-up companies, looking to raise capital face a number of obstacles. Traditional banking has shunned the industry, as the federal laws and regulations make banking “complicated,” to say the least. However, there is an answer that could help find these companies, and that answer is a Regulation A+ offering.
Start-ups looking to raise no more than $50 million now have the ability to do so by a Regulation A+ offering. The recent amendments to Regulation A, which is Regulation A+, under the Securities Act of 1933, as amended (the “Securities Act”), allow companies to increase the amount of capital that they can raise in a Regulation A offering from $5 million to $50 million over a 12-month period.
Scope of the Exemption
The amendments created a two-tiered framework. A key difference between the two tiers, other than the size of the offerings, is that a Tier 2 offering, will subject the issuer to an ongoing reporting requirement of annual, semi-annual and current reports. An offering under Tier 1 will allow an issuer to offer and sell up to $20 million over the course of 12-months, and an offering under Tier 2 will allow an issuer to offer and sell up to $50 million over the course of 12-months. To be eligible, an issuer must be an entity organized, and have a principal place of business, in the United States or Canada. Additionally, securities issued pursuant to Regulation A offerings are not considered “restricted securities” and are freely transferable. The securities that may be offered under Regulation A+ are limited to equity securities.
Integration of Offerings
Regulation A offerings will not be integrated with (i) prior offers or sales of securities, or (ii) subsequent offers or sales of securities that are registered under the Securities Act made in reliance on Rule 701; made pursuant to an employee benefit plan; made in reliance of Regulation S; made more than six months after the completion of the Regulation A offering; or made pursuant to Section 4(a)(6) of the Securities Act, also known as crowdfunded offerings.
The Filing Process
The filing process is rather straightforward if done with experienced legal counsel. To conduct a Regulation A+ offering, an issuer is required to file an offering statement, which may be done through a confidential filing with the United States Securities and Exchange Commission (“SEC”). The benefit a confidential filing is that the contents of the filing will stay confidential until the issuer chooses to allow it to become publicly available, or at least 21 days prior to the day that the SEC approves the offering. Issuers appreciate this confidentiality for a variety of reasons. While a confidential filing provides the issuer an opportunity to make material changes to the Preliminary Offering Circular and avoid disclosing its business plan, the largest benefit is the “testing the waters” feature, which allows an issuer to solicit non-binding investor interest from the public before it completes its offering materials.
The new rules require that the disclosure documents be filed on EDGAR and disqualifies bad actors. Further, Tier 2 offerings require more disclosure than Tier 1 offerings, including audited financial statements.
The Offering Document
Form 1-A is the offering document required to be filed with, and approved by, the SEC for a Regulation A + offering. Part I of the form is intended to help an issuer determine whether it is eligible to conduct an offering under Regulation A +. Part I includes issuer information, such as: jurisdictions in which the securities will be offered; disclosures about unregistered issuances or sales within the last year; as well as certifications that the issuer meets various eligibility criteria. Part II of Form 1-A contains the issuer’s financial statements as well as the Offering Circular. Part II also requires disclosures, such as basic information about the issuer and the offering; material risk factors; descriptions of the business operations; and disclosure of the executive officers and 10 percent owners. Regulation A + offerings have much less stringent disclosure requirements than does a full registration statement which an issuer would need to conduct a registered public offering. Form 1-A requires signatures, the exhibits to the offering circular, including an exhibit index. In addition, there is no filing fee is for the Regulation A+ filing and qualification process. Additionally, a Tier 2 offering allows an issuer to list a class of securities on a national exchange through short Form 8-A, without the need of a Form 10 registration statement.
Qualification, Continuous Offerings and Reporting
It is important to note that an issuer will be unable to sell a security under a Regulation A+ offering until the SEC approves the offering circular. For this reason, it is important to have the best assistance possible when putting all of the offering materials together for submission to the SEC. Once the offering circular is approved, an issuer may conduct continuous offerings of securities until the twelve-month period expires – giving a company ample opportunity to raise much needed capital. Following the completion of the offering, the issuer is required to disclose certain terms of the offering. Issuers that have conducted a Regulation A+ offering are required to file annual reports. The semiannual report must be filed, by the latest, nine months into the fiscal year, and the annual report must be filed within 120 days of the end of the fiscal year. An issuer that has conducted a Regulation A+ offering may suspend its obligations to report after completing reporting for the fiscal year by completing an exit report. Thus, to maintain the appropriate filings after a Regulation A+ offering, an issuer should consult with the experienced legal counsel. Even though Tier 2 periodic reports will satisfy Exchange Act Rule 15c2-11, the final rule does not establish that periodic reports would satisfy the “current information” requirement of Rule 144.
Blue Sky Qualification
Having to comply with the individual filing and disclosure requirements of each state where the offerings were occurring was one of the main reasons Regulation A was rarely used by issuers. Tier 1 offerings are still subject to state Blue Sky regulations under the final rules. Tier 2 offerings will not be subject to state review if the securities are sold to “qualified purchasers,” which are defined as all offerees and purchasers in Tier 2. Consequently, Regulation A+ offerings are an attractive option for growing companies.
Under the Securities Act, a Regulation A+ offering will not be registered; therefore, the liability provisions of Section #11of the securities act for a material misstatement and/or omission do not apply. An issuer, however, will still be subject to seller liability under other federal and state laws. Thus, it is always best to consult with an experienced legal counsel before making any decisions regarding the content of offering materials.
FINRA Rule 5110 prohibits FINRA members and their associated persons from participating without complying with filing requirements of the rule. Rule 5110(b) requires that certain documents and information be filed with and reviewed by FINRA, and these filing and review requirements apply to securities offered under Regulation A.
Regulation A+ makes it significantly easier for Cannabis start-ups to access the capital needed to grow their business. It also helps everyday investors participate in the burgeoning industry, and, hopefully, reap the enormous upside that many think await companies in this industry.
Please contact Sichenzia Ross Friedman Ference LLP if you have any questions or we can assist you in connection with a Regulation A+ offering.
Marc J. Ross, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Floor
New York, New York 10006
Telephone: (212) 930-9700
Direct dial: (212) 398-5541
Facsimile: (212) 930-9725
Adjunct Law Professor
Hofstra University School of Law
Business and Law of Marijuana