Qualification and Ongoing Reporting

Qualification is the gate every Regulation A offering has to pass through, and eligibility is the gate an issuer has to pass through before that.

What Happens Between Filing and Qualification?

• Offering statement: the Regulation A filing, made on Form 1-A, that the Securities and Exchange Commission (SEC) must qualify before any sale of securities can occur
• Before the offering statement is filed, no offer may be made except as Regulation A allows for a solicitation of interest
• Solicitation of interest: the testing-the-waters communication Regulation A allows. An issuer, or a person authorized to act for it, may use it orally or in writing at any time before qualification, including before the offering statement is non-publicly submitted or publicly filed. No money or commitment may be solicited or accepted until qualification
• After the offering statement is filed but before it is qualified, the issuer may use three channels, but may not sell: oral offers, written offers made with a preliminary offering circular, and solicitations of interest, which are already open before filing
• Once qualified, any written offer must be accompanied or preceded by the most recent offering circular filed for that offering

Exam Tip: Gotchas

• Filing is not the same as qualifying. No sale may occur until the SEC qualifies the offering statement, even though oral offers are allowed in the filed-but-not-yet-qualified window.
• Testing the waters does not wait for filing. The filed-but-not-qualified list names the channels open in that window. Of the three, only the solicitation of interest is also open earlier. Qualification is its cutoff, and filing is not its trigger.

What Legends Do the Offering Circulars Carry?

Two cover-page legends are required. Do not mix them up.

• Every offering circular: the cover page must display a statement, highlighted by prominent type or in another manner
  • The SEC does not pass upon the merits of or give its approval to any securities offered or the terms of the offering
  • The SEC does not pass upon the accuracy or completeness of any offering circular or other solicitation materials
  • The securities are offered under an exemption from registration, and the SEC has not made an independent determination that they are exempt from registration
• Preliminary Offering Circular: the outside front cover page must bear the caption "Preliminary Offering Circular," the date of issuance, and its own highlighted legend
  • An offering statement has been filed, and the information in the document is subject to completion or amendment
  • The securities may not be sold, nor may offers to buy be accepted, before the SEC qualifies the offering statement
  • The document is not an offer to sell, or a solicitation of an offer to buy, where that would be unlawful before registration or qualification under state law

Exam Tip: Gotchas

• Qualification is not approval. The SEC must qualify the offering statement before any sale, yet the required cover legend says the SEC does not pass upon the merits of the securities, the terms of the offering, or the accuracy or completeness of the offering circular. A legend that claims SEC review, approval, or a suitability finding is defective.
• The SEC has made no independent exemption finding. The legend says the securities are offered under an exemption from registration, and that the SEC has not independently determined that they are exempt.

Who Is Eligible to Use Regulation A?

An issuer must meet a residency test and clear a list of disqualifying conditions.

• The issuer must be organized under the laws of the United States or Canada, with its principal place of business in the United States or Canada (the two places need not be in the same country)
• The issuer must NOT be:
  • A development-stage company with no specific business plan, or one planning to merge with or acquire an unidentified company or companies
  • A registered investment company or a business development company
  • An issuer of fractional interests in oil, gas, or other mineral rights
  • Under an SEC order revoking or suspending registration of a class of its securities, entered within the past five years
  • Behind on its Regulation A or Exchange Act reports for the two years before it files the offering statement, or for the shorter period it was actually required to file them
  • Disqualified under Regulation A's own bad-actor rule

Think of it this way: this list exists to keep Regulation A pointed at operating businesses raising real capital, not at blank-check shells or issuers already in regulatory trouble.

Exam Tip: Gotchas

• Regulation A has its own bad-actor disqualification test, separate from the one that applies to Regulation D private placements. The two cover similar ground but are not the same provision; match the disqualification test to the exemption the question names.

What Does a Tier 2 Issuer File After Qualification?

A Tier 1 issuer files none of these. It files a single exit report on Form 1-Z not later than 30 calendar days after the offering ends or is completed. Separately, an issuer with an ongoing offering must file a post-qualification amendment to its offering statement at least every 12 months to bring the financial statements current, or sooner if a fundamental change occurs.

Exam Tip: Gotchas

• Tier 1 has no ongoing periodic reports at all. Its only after-the-fact filing is the single exit report. A long-running continuous or delayed Tier 2 offering can keep selling securities only if the issuer stays current on its annual and semiannual filings. The rule names those two only; the special financial report and the current report are not part of that condition.

What Should You Check on Exam Day?

• Confirm no sale can happen before qualification, even though oral offers are allowed once filed. A solicitation of interest (testing the waters) may begin even before filing, but no money or commitment is accepted until qualification.
• Remember the cover legend on every offering circular: the SEC does not pass upon the merits, the offering terms, or the accuracy or completeness, and has made no independent finding that the securities are exempt.
• Match each Tier 2 report to its form: annual to Form 1-K, semiannual to Form 1-SA, current events to Form 1-U.
• Remember Tier 1 issuers file zero ongoing reports and only a single exit report on Form 1-Z.
• Keep Regulation A's bad-actor test separate from the one that applies to Regulation D offerings.