Replies to post #66946 on 02 Secure Wireless, Inc. (OTOW)

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Summary of Regulation A, Securities Act of 1933

Summary of Regulation A, Securities Act of 1933 Overall, offerings under Regulation A are often characterized as “mini registration statements” or “mini-public offerings” in that such offerings possess the general similarities of an offering undertaken pursuant to a full registration statement such as Form S-1 (the securities are freely tradable and general solicitation is allowed, etc.).1 However, unlike a full registration statement, the use of the Regulation A exemption does not trigger filing obligations under Section 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”) or any of the other “full bore” burdens of The Sarbanes-Oxley Act.

Regulation A provides an exemption to Section 5 of the Securities Act of 1933 (the “1933 Act”).
The exemption allows eligible issuers the right to claim the right to claim the exemption and raise up to $5 million in securities sales in any 12 month period. Within this $5 million limit, up to $1.5 million may be used for “secondary” or re-sales by existing stockholders.

The exemption is not available to entities that:


have one or more classes of securities registered under Section 12 of the 1934 Act or which file reports pursuant to Section 15(d) of the 1934 Act;
are not U.S. or Canadian domiciled issuers;
are investment companies;
are blind pools or shell companies or involve fractional oil/gas interests;
Any company where an officer, director, or 10% or more stockholder is a “bad boy” under Rule 262 of the 1933 Act or where any such person at a broker-dealer that sells the offering is such a person.2


An offering under Regulation A can be undertaken using any one of three alternative disclosure formats but, in each instance and at a minimum, Regulation A requires that the issuer include financial statements that are reviewed and if the issuer has audited financial statements, these must be used and the same must conform to the requirements of Article 2 of Regulation S-X of the 1934 Act.

An offering under Regulation A requires that the issuer file the Regulation A Offering Circular with the Securities and Exchange Commission (SEC) and with the state securities commission in each state wherein the offering is to take place. That is, it requires that the issuer submit the circular for review and comment by the staff at the SEC Division of Corporation Finance and similarly by persons at the state level. The SEC and state reviews are undertaken simultaneously but independently and before the Regulation A offering can commence, the issuer must clear all comments. Thus, it is common for the issuer to file the Regulation A offering circular, receive comments and then file amendment(s) in response to the comments received. Some states belong to an inter-state compact and offer “coordinated review” (termed “CR”) so as to allow issuers to receive the comments of one CR office even though the Regulation A offering is to be conducted in several states. This helps to shorten the review process and reduce legal fees as well.

The securities sold in Regulation A offerings are not “covered securities” within the meaning of Section 18(b) of the 1933 Act. As a result, any offering and sale will likely trigger “merit review” in those state jurisdictions that are “merit review” states unless waivers can be obtained. In my experience, such waivers can be obtained in many states (but not all) where a request can be supported with sufficient assurances. In that case, state review is limited and the issuer likely can gain state clearance more quickly (typically 3-4 weeks).

If a FINRA-registered broker-dealer is not used for the Regulation A offering and the issuer undertakes a “self-underwritten offering” or “direct offering” there are some states that impose further burdens on the issuer.

For example, California, although a merit review state, generally allows direct offerings while Florida and certain other jurisdictions historically have been less accommodating. Thus, I recommend that state securities laws be examined before you make further plans.

The extent of legal fees that you can likely expect to incur will depend in large part on the size of the Regulation A offering, the number and type of states wherein the offering is to be conducted, and the extent of due diligence issues that need to be addressed. In my experience and depending on these issues and the resourcefulness of the client, fees have ranged from $20,000 up to $50,000 with the upper end of this range reflecting some of the more unusual circumstances. Of course, this range is likely not very helpful since it does not put into context the underlying issuers and the frequently unique matters that required attention. I am open to payment term arrangements but I would need to understand how you wish to proceed and what terms you have in mind.

In general and if the issuer has financial statements and other necessary due diligence items available, I anticipate that preparation of the Regulation A offering documents requires a 4-5 week process before a filing can be made with the SEC and each of the states.

State securities laws vary (as cited above) but you should anticipate state filing fees will also vary. Some states require fees of a few hundred dollars while others may reach $2,500. The SEC also requires a filing fee, but this is small.

The information needed covers many areas. In general, it includes corporate information (articles, by-laws, board and shareholder minutes, etc.), the business plan, stockholder list, financial statements, material contracts, prior securities issuances, resumes/background information on officers and directors, and the like. Where intellectual property is involved or where environmental issues, government licenses or permits are present, then these too need to be examined.

All of the securities sold in the Regulation A offering are freely-tradable securities and any purchaser, whether it be a friend or family member, acquires securities that are freely tradable.

3
Securities generally may be sold for cash or other consideration, including, but not limited to, services. These services may include advertising and public relations services as well. An issuer can, at any time, proceed to prepare and file a Form 10 with the SEC to register one or more classes of securities under Section 12 of the 1934 Act. This can be done at any time but clearly if it is done, the issuer loses the right to claim the Regulation A offering exemption on a going-forward basis and, at the same, the issuer becomes subject to many other obligations under the 1934 Act.4


1 An offering under Regulation A does require and our federal and state securities laws require that the offering circular used in the Regulation A offering not contain any material misstatements or omissions of material fact. Notwithstanding these requirements, liability is not imposed under Section 11 of the 1933 Act, but any such disclosure defects can trigger liability under Section 10(b) and Rule 10b-5 of the 1934 Act. Thus, great care must be undertaken to ensure that no violation of the anti-fraud provisions arises in connection with a Regulation A offering.

2 Note that Rule 144, however, will apply if the purchaser is an “affiliate” as defined in Rule 144(a)(1) however.

3With your permission, I will not attempt to discuss the Rule 262 disabilities here. The matter will need to be carefully examined by way of due diligence.

4 With your permission, I will not attempt to summarize these provisions here.

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