Regulation A+ Post-Issuance Liquidity
For the investor, the degree of actual liquidity depends on what the Issuer company does after their Reg A+ offering. If they list on the NASDAQ or NYSE then liquidity can be excellent. If they list on the OTCQB or the OTCQX, then the liquidity can be good to very good.
When an Issuer company does not list on the above exchanges, then liquidity is limited to the specialized Reg A+ aftermarket exchanges and broker-dealers that support Reg A+ share trading in the aftermarket. These exchanges are small and offer limited liquidity at present, they are growing to fill the need.
The Issuer company may choose to offer direct liquidity to their investors by defining in their Offering Circular what valuation method they will use and what other restrictions will apply. This type of liquidity is regulated.
Affiliates of the company will need to resell their Reg A+ shares in reliance on Rule 144 if they want to sell publicly. There’s no holding period imposed but there are limitations on the number of shares they can sell at any one time, they’ll need to sell through a broker or market maker, they’ll have to file a Form 144 with the SEC and “adequate current public information” must be available about the company, which means it must be compliant with Regulation A’s ongoing reporting requirements
The pleasant surprise for many company founders and long-term investors is that when a Tier 2 type Reg A+ completes it’s 6 monthly reports of profits and losses, then for 90 days after the results are announced, the company founders and long-term investors that have passed their Rule 144 holding period (usually 12 months) are allowed to sell their non-Reg A+ shares. Preferred or common stock. Insiders (management and founders) and investors that own more than 10% of the stock in the company are restricted to selling less than 1% of the “Float” (the daily trading volume of shares or other securities) per day.
Issuers that want their Reg A+ shares to be tradable all year round can make quarterly management financial filings with the SEC, this then opens up liquidity for insiders all year.
Regulation D 506(c) Post-Issuance Liquidity
The securities sold in a Reg D offering are “restricted” under US securities law and cannot be easily resold for the first year. The one-year holding period applies even if the company has done a Reg A+ offering. The Reg D shares are treated differently from the ones sold under Regulation A, even if they are of the same class. It’s technically not correct to say that there is always a one-year lockup on new investors. The limitations become easier to comply with for people (or entities) who are not affiliates after a year has passed since the securities were first acquired from the issuer (company). There are exceptions to the one-year lockup – four such exceptions are listed below;
Holders of restricted securities of non-reporting companies who are not affiliates, (affiliates are a type of insider) may resell in the following ways:
- Privately in sales under the so-called “Section 4 (1 ½) exemption”, typically only to other accredited investors and on the basis of an opinion of counsel at any time;
- Privately under Section 4(a)(7) of the Securities Act to accredited investors at any time;
- Privately to “qualified institutional buyers” under Rule 144A at any time;
- Outside the United States in reliance on Regulation S at any time;
- Publicly under Rule 144 one year after the securities were issued.
The exemptions for private sales mentioned above all have conditions that have to be met and the securities remain restricted. There may also be contractual restrictions on such resales or requirements set forth in the bylaws and of course in all cases, state law requirements have to be complied with as well.
Officers, directors or investors who hold more than 10% of the company’s securities, might be “affiliates” and their shares will be subject to additional restrictions on resale. They’ll likely need a lawyer to advise them whether these restrictions apply.
In the case of affiliates, the securities are both “restricted” and “control” and investors need to hold them a year from the date on which they got them from the company before can be resold publicly. The ways in which investors can sell publicly are the same as discussed above for non-affiliates. Again, for affiliates there are limitations on the number of shares they can sell at any one time, they’ll need to sell through a broker or market maker, they’ll have to file a Form 144 with the SEC and “adequate current public information” must be available about the company, which means it must be compliant with Regulation A’s ongoing reporting requirements. If investors want to resell within that year, they’ll need to resell them in another private offering, probably limited to accredited or institutional investors.
Once the securities are resold publicly they are no longer restricted. Warrants are treated the same way as all other securities sold under Reg D.
The securities sold in a Reg D offering are “restricted” under US securities law and cannot be easily resold for the first year, although they can be resold in private transactions to other accredited investors. After one year, non-affiliates of the company may sell the securities publicly without restrictions (non-affiliates are investors that are not employees or executives or founders of the company, and they own less than 10% of the company).
There are currently a limited number of trading forums for the shares of early-stage privately owned companies, whether that trading takes place in private transactions with accredited investors, or publicly to all investors. New trading forums are being developed, however. A company can choose to explore having their securities (shares) quoted or posted on these trading forums, so that non-affiliates could sell them. When a company takes these steps, there can be no assurance that management will succeed in doing so, and there can be no confidence ahead of time in how much liquidity or how viable a market might develop if they did.
