Reg "A" Blue sky for Tier 1

Reg "A" Blue sky for Tier 1

In this memo, the benefits OTC shell companies stand to gain in Tier1 under the Reg A+ will be the main subject.

All transactions involving the trade of securities in Tier 1 conducted within the provision of the Reg A+ is mandated to be in accordance with the regulations enforced by the Blue Sky laws. The trading operations in Tier 2 are not bound by these regulations and the highest demand from the state is limited to requesting that the company files a Form D, it is also not mandatory for the Tier 2 offerings to be presented to the state for review.

We see a better future for the corporate world with the new structure being implemented for the Reg A+. This will make it easier to generate the needed funding capital and revive the Shell companies classified as non-reporting OTCs.

The “Blue Sky” law is the term given to the laws governing transactions involving state securities. It is mandatory for companies to obey the state and federal laws when trading existing or new securities. This makes it important for every company in this business to properly understand the “Blue Sky” laws to avoid breaking the rules.

As earlier indicated, Reg A+ comprises of two distinctive Tiers; they are Tier1 and Tier 2. The difference between these two Tiers lies in the volume of capital companies operating within the confines of the Tiers are permitted to raise. Under Tier 1, the capital limit is set at $20 million while Tier 2 companies can raise as much as $50 million for business.

The difference in volume transactions in both Tiers makes it mandatory for the Companies operating in Tier 2 to be critically audited by the regulatory bodies. The Companies under Tier 1 are not required to undergo any audits except audits carried out by internal coordination.

All companies who plan to put up their stock in the open trading market or those companies that already have stocks active in the trading market must ensure that a complete registration has been duly done with the regulatory arm of the state securities commission. Stock trading in public offering within the law will only be achievable after the Blue Sky laws have been properly understood. This law advocates strict adherence to the statutes for all company stock being sold.

Tier I Blue Sky

Primary and Secondary sales

A primary sale is a public offering made by a company for the sale of new stock to investors with the adequate purchasing capital.

A secondary sale is the sale of privately owned stocks to a new buyer. A good example is when a top executive in a company decides to sell some of his shares in the open market.

Some important rules guide transactions involving the secondary sale of shares. These checks are put in place to bring order to the market. After the initial public offering during which the shares were acquired in the first year, there is a limitation on the sale of the newly purchased shares. After which, they can be traded under Tier1 or Tier 2. The trade limits under Tier 1 is pegged at $6 million while transactions under Tier 2 should not exceed $15 million.

The new regulations also extend to trading activities of affiliates related to the issuer. They enforce limitations on trading activities for secondary sales which should not exceed 30% of the actual value in dollars under Reg A+ offerings. These limitations apply only in the first year after the initial offerings; the reason for this check is to encourage the secondary sale to be done only when there are sales offers made by the issuer to raise capital. The SEC tries to protect the interest of the issuer. At the end of the first year, there will be no further limitation on secondary sales. Transactions can be made in accordance with the limitations pegged for both the Tier 1 and Tier 2.

Tier 1

The various states have their independent rules when it comes to trading and offerings. For a Tier 1 stock to be offered in a particular state, it has to conform to the binding rules. Another option available to Tier 1 companies is taking advantage of a new system which permits the 46 states to jointly work on a review for the offering.

This new system was designed and introduced by the American Securities Administrators Association (NASAA). All 46 states have been brought under this system which has generally been adopted. The system is run by an administrator who receives the proposal offering from the issuer. This is then passed on to the 46 states after which an approval or a decline will be made known to the issuer. It usually takes 21 working days to complete the entire after the statement of the offering has been presented to the administrator.

The good news is that in this system, the issuer has the permission to select target states for this consideration. This will save costs and prevent the inclusion of states where the Merit Review system strongly applies.

Merit Review

Almost all the issuers avoid the Merit review because of the difficulty in overcoming its hurdles.

The conditions under a typical merit review include-

  • Sales restrictions- This has to do with the restriction on sales to parties who have inside affiliations through which they could purchase the offering at a cheaper rate;
  • Strict rules on loans and debts- all loans granted to insiders must be paid off before the public offering, while funding and other transactions through external third parties must be vetted by more than half of the total number of independent directors;
  • Tough requirements for Debt securities- this review mandates the provision of proof of sufficient funding in the previous fiscal year that would cater for fixed charges, and debt servicing when payment is due. Demand is also placed for a trust indenture that satisfies the Trust Indenture Act of 1929 which specifies that an adequate backup plan is put in place in the event of unforeseen circumstances;
  • Authority to impound generated funds- all generated funds can be impounded by these statutes, this also applies to best efforts and small/major offerings;
  • Strict administration- there are strict rules controlling actions like restricting the stock for securities when a public offer is made, dictating the pricing which should not fall below 85% of the fair market value for the affiliated ordinary stock on the date the offer is made, and restricting underwriters compensatory issuances;
  • Preferred stock - demanding total income in the previous fiscal year that is enough to cover all fixed cost, demands of the offered preferred stock, dividends and redemption of preferred stock; and demanding the creation of redemption provisions;
  • Promoters equity investment- all companies that are still developing are required to peg the promoters’ equity at a value higher than 10% of the overall public offering;
  • Promotional Shares- in cases where promoters have been issued shares at less than 85% of the proposed value for the public offering, an escrow will be needed for the shares or there will be a reduction in the price offer in the case of offers made by companies still developing;
  • Restrictions on expenses and the extent of sales security holders can make- Only a permitted percentage of the offer can be used to accommodate any expenses. An extra payment termed as pro rata will be paid by the security holders as the bill for accommodating the shares to be sold in a public offering;
  • The absence of equal voting privileges- voting privileges are closely controlled in the favour of the states except in cases where the offers are made with high valued dividends or adequate plans for liquidation;
  • Strict specifications for capitalization- There are strictly controlled measures for issuing a security with the exception of a case where there is common equity involving a relatively new issuer;

Dictating the Price of offerings- it is common for demands to be made that the price tagged should be in accordance with the value in the books, the history of transactions that made earnings and the various range of industry prices in cases where no market has been clearly identified for the security. In these cases, a specific price tag is projected for the offering (usually as low as $2, not exceeding 25 times value of earnings). Also, offerings characterized by pricing processes which could be used to manipulate the offering prices are strictly prohibited;

Many companies will not be able to meet the requirements of state merit review. This is why these promotional companies choose only states where merit review is not applicable.

Active Stocks already being traded

Issuers who have successfully registered on manuals like the Standard &Poor’s could take advantage of the manual exemption for stocks already being traded provided they comply with the regulations for secondary traded stocks. This means the Blue Sky laws will apply for these offerings in over 38 states.

Only a proper listing on a securities manual will qualify the issuer to be considered for an exemption, however, it depends on if the state in question considers exemption in its laws. The information in the manual must show the following information-

  • A comprehensive identification of the issuer, the officers, and directors (names and positions).
  • A current balance sheet of the issuer.
  • A current profit and loss statement most preferably covering the previous fiscal year of active business.

Unsolicited Brokerage Transactions

Exemption can also be applied to unsolicited brokerage transactions done by the holders of Reg A+ securities. This allowance permits a broker-dealer to conduct a non-issuer transaction to get an unsolicited order to make a purchase which will be exempted. However, those unsolicited transactions directly done by the issuer will not be exempted.

Summary and Recommendations

If you currently own a non-reporting OTC shell company, it is possible for your company to partake in Tier 1 offerings where shareholders can perform transactions by orchestrating a reverse merger with a currently operating company.

Taking advantage of Reg A+ makes it possible for owners of shell companies to list the stocks of their shareholders for sale; this would not be easily attainable otherwise because of the restrictions on using the Rule 144 when attempts are made to sell stock through private transactions to investors.

Now your company can utilize the provisions under Tier 1 to make offerings in over 46 states as long as the transactions are done within the state securities regulations that control Tier 1 transactions.

As earlier stated, taking advantage of manual exemption will give your company the authority to make secondary trading in markets across 38 states.

The NASAA has instituted a comprehensive review program to oversee the Regulation A. offerings.

The North American Securities Administrators Association, NASAA have presented the following requirements-

  • Coordinated Review Application Sec 3(b)
  • Cover Memo and Application Fee Submission
  • Review Protocol
  • Coordinated Review FAQs
  • Illustrated Timeline
  • State Filing Requirements


The NASAA’s coordinated review program is aimed at making it easier for the Regulation A offering to be filed in multiple U.S. jurisdictions. In accordance with the protocol, the business representative submits a completed Form CR 3(b) and Form 1 A with the accompanying exhibits by email to the Washington State. The specified email for these submissions is – The issuer then proceeds to mail the fees for filing separately to the different jurisdictions in the US where the different registration will be done. The fees received will be sorted out by using the name of the issuer indicated on the check and a copy of the attached Form 1 A.

In states where the merit review protocols apply, two examiners will be appointed to carry out the review. They are they lead merit examiner and the lead disclosure examiner. In states where the merit review does not apply, only the lead disclosure examiner will be appointed to carry out the review. Excerpts from relevant NASAA statements in the policy would be used by the reviewing authorities. The aspects of the policy that would be suppressed by the review process includes the following-

  • The statement policy which addresses the promoters’ equity will not be valid in this case.
  • The issuance of promotional shares will be done in accordance with the statement of policy; however, half of the share value would be put in escrow to be released only on the first and second year after the initial offering. The second release of promotional shares will free up all shares that were confined by this regulation.
  • The period it takes to complete and offering with respect to the last date on which the offering was completely executed.
  • The statement of policy which covers the provision of loans and other relevant transactions will be applicable with the exception that there will be no demand for the disclosure document as stated in Section VII.C.3 in this policy.

It is the responsibility of the lead examiners to create a comment in the form of a letter which addresses any errors or lapses in the documents that have been filed. This entire review process is usually done within a communicated time frame while the comment letter is promptly created when the review is completed. Upon receipt, the issuer will reply the highlighted lapses in the comment letter; this should be done promptly to avoid any delays in the registration of the offering. In cases where there the lead examiner has been satisfied, the clearance will be issued within 21 working days after the initial filing.

Alternative Resources

A copy of the comprehensive list of NASAA’s statements of Policy including the content of the different policies can be seen here.

Small Business and the SEC (contains information about Regulation A).