Federal Securities Regulation 3 of 3 (32)

Question 1

Emerging Growth Companies (EGCs)

Answer 1

An entity that has less than $1 billion in revenues as of the end of its most recent fiscal year, entitling it to take advantage of the provisions of the JOBS Act, continuing as an EGC until the earliest of:

• The last day of the year of the 5th anniversary of the initial public offering.
• The last day of the year in which the entity achieves $1 billion or more in revenues.
• The date on which the entity has issued a cumulative total of $1 billion in nonconvertible debt over the preceding 3-year period.
• The date on which the entity becomes a large accelerated filer.
• When the company has more than 2,000 shareholders (500 if they are nonaccredited).

Question 2

Regulation Crowdfunding

Answer 2

This exemption makes it possible for privately owned companies to sell securities to investors over the internet through an SEC-registered intermediary—i.e., either a broker-dealer or a “funding portal.” Amounts are subject to inflation adjustments:

• Up to $1 million (as adjusted for inflation) may be raised in a 12-month period.
• Limits are set on amounts individual investors may invest per 12-month period (as adjusted for inflation):
  
  • The greater of $2,000 or 5% of annual income or net worth (if less), for those with annual income or net worth less than $100,000.
  • Up to 10% of annual income or net worth (if less), up to a maximum of $100,000, if both annual income and net worth equal or exceed $100,000.
• Securities generally cannot be resold for 1 year.
• Disclosure requirements:
  
  • Up to $100,000
    
    • Federal tax return
    • F/S certified by principal executive officer
  • $100,000 – $500,000
  • Reviewed F/S
  • $500,000 – $1,000,000
    
    • Audited F/S —unless crowdfunding for first time, then Reviewed F/S.

Question 3

Regulation A

Answer 3

Applies to offerings that raise up to $50M within 12 months. Securities must be unrestricted equity securities, debt securities, and debt securities that are convertible into equity securities. The requirements are:

• SEC must be notified within 20 days of the first sale.
• Offering circular (i.e., mini-registration statement) is required.
• Disclosure requirements:
  
  • Tier 1—Up to $20M, with up to $6M in offers by affiliates of the issuer.
    
    • Unaudited F/S
  • Tier 2—Up to $50M, with up to $15M in offers by affiliates of the issuer.
    
    • Audited F/S
    • Nonaccredited investors are limited to 10% of annual income or net worth, if greater.
• Secondary sales are limited to 30% of the original offering or any other offering in the first year.