Regulation A Tier 1 vs. Tier 2: Which One Should You Actually Use?
If you are considering a Regulation A offering, one of the first decisions you will have to make is whether the offering will be conducted under Tier 1 or Tier 2. At first glance, the choice seems pretty simple: Tier 1 allows you to raise up to $20 million, while Tier 2 allows you to raise up to $75 million during a 12-month period.
But the size of the offering is only part of the decision.
In fact, a company planning to raise $10 million or $15 million could still choose Tier 2 even though the offering falls comfortably below the Tier 1 limit. The reason is that the two tiers differ in several important areas, including state securities regulation, audited financial statements, ongoing SEC reporting, and limitations that apply to certain non-accredited investors.
Understanding those differences before you start can help you choose a structure that works not just for the capital you want to raise today, but for the business you are trying to build.
First, What Is Regulation A?
Regulation A is an exemption from full SEC registration that allows smaller companies to offer securities to the public. Unlike many private offerings, Regulation A can be marketed broadly and can accept investments from both accredited (generally high net worth) and non-accredited investors, subject to the requirements that apply to the particular tier.
That combination is one of the reasons Regulation A can be so attractive to real estate sponsors and other companies with a large potential investor audience. Instead of limiting your capital raise to people who meet the accredited investor definition, you can potentially open the offering to a much broader group of investors while publicly advertising the opportunity.
Regulation A still requires a significant securities compliance process. The issuer files an offering statement on Form 1-A with the SEC, and the offering generally cannot begin selling securities until the SEC has qualified it. Both Tier 1 and Tier 2 operate within that basic framework.
Where the two tiers begin to separate is in what happens around that qualification process and after the offering is launched.
Tier 1: Raising Up to $20 Million
Tier 1 allows an issuer to raise up to $20 million in a 12-month period. For an offering of $20 million or less, the issuer can actually choose between Tier 1 and Tier 2, so being below the $20 million threshold does not automatically mean Tier 1 is required.
There are reasons Tier 1 can be attractive. One of the biggest is that Tier 1 does not automatically require audited financial statements. If audited statements have already been prepared for another purpose, they generally need to be provided, but Regulation A itself does not impose the same audit requirement that applies to Tier 2.
Tier 1 also has lighter ongoing SEC reporting obligations. After completing or terminating the offering, a Tier 1 issuer generally files an exit report on Form 1-Z rather than continuing with the annual, semiannual, and current reporting framework that applies to Tier 2.
For the right offering, those differences can reduce some of the cost and administrative work associated with Regulation A.
But there is a significant tradeoff.
The State Securities Issue Changes the Conversation
A Tier 1 offering does not receive the same state-law preemption that a Tier 2 offering receives. In addition to going through the Regulation A process with the SEC, a Tier 1 issuer must generally register or qualify the offering, or rely on an available exemption, in each state where it intends to offer or sell the securities.
That may not be a major problem if the company plans to raise capital in one state or within a relatively small geographic area. It becomes a much bigger consideration when the issuer wants to market nationally.
Imagine a real estate sponsor with an email database of investors located throughout the country. The sponsor also produces podcasts, attends conferences, publishes videos, runs social media advertising, and wants to market the offering without worrying about whether the next prospective investor lives in Texas, California, Florida, New York, or another state.
That type of strategy is one of the reasons Tier 2 can become attractive even when the company does not need to raise more than $20 million.
Tier 2: Raising Up to $75 Million
Tier 2 increases the offering limit to $75 million in a 12-month period, but the larger raise is not its only advantage. For many sponsors, the ability to conduct a national offering without separately registering or qualifying the offering with every state securities regulator is just as important.
Tier 2 offerings are generally exempt from state securities registration and qualification requirements. States can still require notice filings and fees, and they retain antifraud and enforcement authority, so state securities law does not simply disappear. The regulatory framework, however, is very different from going through substantive registration or qualification in each state where investors may participate.
For a sponsor trying to build a national investor audience, that distinction can be significant.
You may only intend to raise $15 million in your first offering. But if your real goal is to create a nationwide marketing platform, grow an investor database, and continue raising capital for years, choosing a tier solely because $15 million happens to be below $20 million may be looking at the wrong issue.
Tier 2 Comes With Additional Responsibilities
The benefits of Tier 2 come with additional compliance requirements. Tier 2 issuers must provide audited financial statements as part of the offering process and continue filing reports with the SEC after qualification.
Those ongoing filings generally include an annual report on Form 1-K, a semiannual report on Form 1-SA, and current reports on Form 1-U when certain specified events occur. Depending on the circumstances, an exit report on Form 1-Z may also eventually be required.
That means a Tier 2 issuer needs to budget for more than simply getting through the initial SEC qualification. There are accounting, audit, legal, filing, and administrative responsibilities that continue while the offering is operating.
For a company looking at Regulation A as a one-time capital raise, that may feel like additional overhead. For a sponsor trying to establish a long-term capital-raising platform, the analysis may be different.
There is real compliance involved, but there is also real infrastructure being created.
What About Non-Accredited Investors?
Both tiers can allow non-accredited investors to participate, but another important difference involves how much certain non-accredited investors can invest.
Tier 1 does not impose the Regulation A investment limitation that applies under Tier 2. In a Tier 2 offering that will not be listed on a national securities exchange, a non-accredited individual is generally limited to investing no more than 10% of the greater of annual income or net worth. For a non-accredited entity, the limitation is generally 10% of the greater of annual revenue or net assets at fiscal year-end. Accredited investors are not subject to that Tier 2 limitation.
For most sponsors, that does not eliminate the value of bringing non-accredited investors into the offering. It simply becomes part of how minimum investments, investor tiers, and the overall capital-raising strategy are structured.
This is also where Regulation A starts to look very different from a Rule 506(c) offering. Rule 506(c) permits general solicitation, but every purchaser must be accredited and the issuer must take reasonable steps to verify accredited status. Regulation A can give a sponsor the ability to market publicly without restricting the entire investor base to accredited investors.
So Why Would You Choose Tier 1?
Tier 2 tends to receive most of the attention, particularly from sponsors who envision a large national offering. That does not mean Tier 1 has no place.
A smaller offering concentrated in one or a few states may benefit from Tier 1’s lighter federal reporting requirements. A company may also place significant value on avoiding the mandatory audit requirement associated with Tier 2, particularly if the offering does not justify building a larger compliance infrastructure.
The important point is that Tier 1 should be selected because its regulatory structure fits the offering, not simply because the company happens to be raising less than $20 million.
Likewise, Tier 2 should not automatically be selected just because $75 million sounds better than $20 million. The company needs to be prepared for the financial reporting, audits, ongoing SEC filings, and other responsibilities that come with operating under Tier 2.
Think About Where You Are Going, Not Just What You Are Raising
When we talk with sponsors about Regulation A, I think this is where the conversation becomes much more interesting.
Suppose you are raising $15 million today. If that is likely to be your only public capital raise, your analysis may look very different from that of a sponsor who wants to build a national investor base, acquire multiple properties, expand into new markets, and continue raising capital for years.
The second sponsor is not really building a $15 million offering. That sponsor is building a capital-raising business.
Regulation A can be particularly powerful when it is approached that way. Instead of thinking exclusively about one property or one fund, the sponsor begins thinking about investor acquisition, repeatable marketing, ongoing securities compliance, reporting infrastructure, and how future capital raises fit into the larger business.
That is also why the difference between Tier 1 and Tier 2 is about much more than $20 million versus $75 million.
Choosing the Right Regulation A Structure
There is no universal answer to whether Tier 1 or Tier 2 is better. The right choice depends on where your investors are located, how much you intend to raise, whether you want to market nationally, your financial reporting readiness, the type of securities being offered, and your longer-term plans for the business.
For many real estate investment sponsors, Tier 2 provides the scalability they are looking for. For others, Tier 1 may still make sense based on the size and geographic scope of the offering.
The important thing is to make that decision as part of the planning process rather than after the offering has already started taking shape. Regulation A requires enough preparation that your capital-raising strategy, securities structure, financial reporting, and marketing plans should be considered together.
If you are considering a Regulation A offering, schedule a free consultation with Dodson Legal Group. We can discuss what you are trying to raise, how you intend to market the offering, and whether Tier 1, Tier 2, or another securities exemption makes the most sense for what you are trying to build.