In 2015, the SEC adopted new rules intended to improve emerging companies’ ability to raise capital. Part of the Jumpstart Our Business Startups (JOBS) Act (Regulation A+) adds a class of small issue securities exempted from public registration under the Securities Act of 1933 (the 1933 Act). Regulation A+ attempts to make it easier for smaller businesses to raise capital by limiting disclosure requirements and increasing the pool of potential investors.
What Is Regulation A+?
Initially, private companies could only crowdfund from accredited investors – the wealthiest 2% of Americans. Regulation A+ now allows private growth-stage companies to raise money from all investors, greatly increasing the availability of capital to emerging companies.
Regulation A+ allows private companies to raise up to $50 million from general public and not just accredited investors. In this respect, Regulation A+ acts as a vehicle for companies to raise capital from a wide pool of public investors, almost like a mini-IPO.
Why Choose Regulation A+?
Regulation A+ offerings are designed to be more efficient and cost effective than a traditional IPO. For instance, companies raising capital through Regulation A+ still need to file with the SEC to get approval. However, the filing fees associated with a Regulation A+ offering are significantly lower than a traditional IPO.
The ongoing disclosure requirements are also less burdensome. Rather than the detailed registration statement required in an IPO, companies filing under Regulation A+ only are required to file an offering statement with the SEC. The offering statement is considered a qualification statement and is less costly to prepare than the broadly inclusive IPO registration statement.
Who Can Use Regulation A+?
Regulation A+ creates two tiers of securities offerings. Tier 1 applies to offerings up to $20 million in a twelve-month period. A maximum of $6 million can be raised from affiliated holders of securities, such as company founders wanting liquidity. A Tier 1 company is required to file an offering statement with the SEC in any state in which the company offers its securities.
Tier 2 applies to offerings over $20 million and up to $50 million in a twelve-month period. Not more than $15 million can be raised from security-holders affiliated with the issuing company. Unlike Tier 1 companies, however, only the SEC is allowed to review the offering statement of a Tier 2 company, as states are preempted from this review.
Is Regulation A+ Right For My Business?
The rules became effective in June 2015. The SEC reports that over 30 companies have publicly filed under Regulation A+ and another 16 have submitted draft offering statements for review. The filings have been from many different types of companies, although the SEC reports that the new offering has been especially popular among real estate companies.
While companies should consult with a qualified legal representative to see if Regulation A+ is right for them, there is no question that this is a promising vehicle to raise capital for many private emerging companies.