Regulation A Blue sky for Tier 1

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.

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.

Tier 1

Merit Review

• 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;

Active Stocks already being traded

• 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.