Crowdfunding

With Reg A+, Regulators Usher in the “Mini IPO”

Locavesting Staff | April 6, 2015

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Another piece of the JOBS Act fell into place on March 25, when the Securities & Exchange Commission adopted final rules that update Regulation A, an obscure securities exemption that has languished for decades.  The enhanced Reg A+, as the new rule is known, opens up major new funding options for growth-oriented businesses and allows small investors to participate in that growth.

Reg A has been on the books for decades. On the surface, it was attractive: it allowed companies to raise up to $5 million from both accredited and unaccredited investors, and to advertise the offerings freely.  In exchange for those freedoms, companies were required to file disclosure documents with the SEC, although they were much less onerous than those needed for an initial public offering.  The companies were not subject to Sarbanes-Oxley obligations like public companies are, and could also “test the waters” before they decided to go ahead with an offering. In that sense, Reg A has always been considered a sort of IPO-lite.

But Reg A had a major drawback. Companies using the exemption were subject not only to SEC registration, but also to a patchwork of state “Blue Sky” laws—some of which could block an offering based on subjective measures. That dual registration process substantially raised the cost of Reg A offerings and generally outweighed the benefits. As a result, it’s rarely been used.

A Real Alternative

That’s about to change.  The new Reg A+ rules, mandated by Title IV of the JOBS Act, drastically increase the amount companies can raise to $50 million and streamline the filing process. In its final rules, the SEC surprised many observers by preserving a fairly expansive view of the exemption that includes all investors and precludes at least some offerings from state-by-state review. 

Suddenly, Reg A+ offers a real alternative to both expensive initial public offerings and today’s limited forms of crowdfunding. And it gives small investors a chance to get in on exciting investment opportunities that would have been reserved solely for accredited investors and insiders.

The SEC created two tiers of Reg A+ offerings:

Tier 1

  • Companies can raise up to $20 M in a 12-month period
  • SEC review plus state review required (may use a new coordinated 50-state review process)
  • No audited financials necessary
  • Ability to “test the waters”
  • Some restrictions on the sale of securities in the first 12 months

Tier 2

  • Companies can raise up to $50M in a 12-month period
  • SEC review required
  • Pre-emption from state review
  • Unaccredited investors limited to the greater of 10% of annual income or net worth
  • Audited financials and ongoing, semi-annual financial reporting required
  • Ability to “test the waters”
  • Some restrictions on the sale of securities in the first 12 months

For a more in-depth analysis, see this pdf prepared by Crowdcheck.

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