Regulation A+: Good News For Non-Accredited Investors
By Kevin Vela
Recently released Regulation A+ rules are creating excitement for early-stage ventures that didn’t previously have access to VC capital and for the millions of Americans who can now invest in innovative private companies. The new rules, mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act, update and expand Reg A, an existing exemption from registration for smaller issuers of securities. The Reg A+ “mini-IPO” enables small and medium-sized companies to offer and sell up to $50 million of securities in a 12-month period without going through the full SEC registration process, and in some cases avoiding the state registration process.
Why choose a Reg A+ offering?
Reg A+ provides several benefits to the issuer and the shareholders subject to certain restrictions:
- The ability to raise large amounts of capital
- The ability to offer and sell unrestricted shares to accredited AND non-accredited investors
- Founders and other insiders are able to sell some of their shares
- The offering can begin to develop a trading market for shareholders to gain liquidity
How does an A+ offering work?
Regulation A+ provides two tiers of offerings. Tier 1 is for offerings up to $20M, and Tier 2 is up to $50M; issuers with offerings up to $20M can elect either tier. Both Tiers are subject to certain basic requirements including issuer eligibility, disclosure, and other matters, drawn from current provisions of Regulation A. If an issuer wants to take advantage of Regulation A+ it will have to issue an “offering circular.” Tier 2 offerings, however, are subject to additional disclosure and ongoing reporting requirements.
Offerings up to $20M in a 12-month period, with not more than $6M in offers by selling security-holders that are affiliates of the issuer. Under Tier 1 there is no limit on amounts to be raised from non-accredited investors and in most cases, no ongoing reporting to the SEC. The issuer must provide reviewed, but not audited, financial statements. The downside is that issuers have to comply with “blue sky” laws of every state in which they plan to raise money. Complying with state securities regulators makes Tier 1 difficult for to anyone trying to raise capital from the national crowd of non-accredited investors. This option makes sense for issuers only raising money in a contained geographic area that do not need to comply with more than one or two state securities laws.
Offerings up to $50M in a 12-month period, with not more than $15M in offers by selling security-holders that are affiliates of the issuer. Under Tier 2, non-accredited investors can only invest 10 percent of the investor’s income or net worth. Tier 2 allows you to make an offering with no state blue sky law compliance. The company filing in Tier 2, however, is to be subject to other filing requirements including a requirement to provide two years of audited financial statements and a requirement to file annual, semiannual, and sometimes current event reports.
One of the most beneficial provisions of Tier 2 offerings is the “testing the waters” provision. This allows issuers to preempt state-level requirements to determine interest before filing the offering. Issuers may ask prospective investors if they would be interested in investing, what amounts they would invest, which securities would be of most interest, and where the investors live – all with little restriction using the Internet, social media, and other means of widespread communication. The ability to gauge interest before spending a great deal on compliance fees is an amazing opportunity.
Is my Company Eligible?
Regulation A+ does not add additional eligibility requirements and follows existing Reg A requirements. Reg A+ does, however, add two categories of ineligible issuers. The exemption would exclude (1) issuers that have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five year and (2) issuers who have not filed ongoing reports required by the rules during the preceding two years.
I’m in, now what?
Regulation A+ has created valuable opportunities for A-round ready companies. Yet, while the filing process has been reduced, the work that a company needs to execute in order to be successful has not, as the time and fiscal perspective will still be considerable with no guaranteed promise of results. Every business needs to understand the benefits and obligations that come with the A+ offering and evaluate if it is the best fit for them. Successful A+ offerings like any securities offering require educated partners that understand the process. Additionally, firms should ensure that internal and external communications teams, as well as those that will be spokespeople, are all aware of the communications guidelines to ensure compliance with anti-fraud provisions at both the state and federal level.