Mini-IPOs: The New Regulation A+

Creating ‘IPO-Lite’ Investment Opportunities

On Wednesday, 25th March, 2015, the Securities and Exchange Commission (SEC) approved the final rules to activate implementation of an improved Regulation A (referred to by the media and others as “Regulation A+) under Title IV of the Jumpstart our Business Startups Act, or JOBS Act. The approval of this new Regulation A+ is a major breakthrough in the crowdfunding industry as it allows startups and small businesses to raise a maximum of $50 million through crowdfunding under this law.

Regulation A+ Background

The original Regulation A was a provision in the federal law that was intended to pave the way for companies to fund raise a maximum of $5 million through public offers. However, because of the great cost and relatively small sum that a company could raise under it, it was rarely used.

The original Regulation A’s major shortcoming was the fact that it required companies to register their offerings in every state where they intended to offer securities. Compared to other commonly applied laws like Regulation D, this requirement made it extremely costly for companies to offer securities. Regulation D requirements allowed companies to raise similar amounts or even more without incurring high costs of complying with state laws.

However, the problem with Regulation D has always been that, in general, and with the exception of a few, relatively small dollar amounts permitted to be raised from certain members of the general public (basically the “3F’s, i.e., friends, families and other fools), the use of Regulation D has been limited to offerings confined to accredited investors, i.e., individuals earning $200,000+ per year, or those with a net worth of at least $1 million, excluding their principal residence.

Regulation A+ is a Game Changer

The newly approved Regulation A+, which became effective for use as of June 19, 2015, fixes the provisions of the old Regulation A.  It does this, first, by raising the maximum ceiling from $5 million to $50 million and, second, by eliminating the state review requirement. Most importantly, the new rules established by SEC for Regulation A+ now expands the pool from whom these funds can be raised, from just accredited investors, as provided by Regulation D, to the general public.

This means that startups and small businesses can now undertake small Initial Public Offerings and secure funds, not just from accredited investors, but from the general public as well. This will surely be a game changer in the way businesses access capital going forward.

Why Regulation A+ is Important for the Crowdfunding Industry

Approval of Regulation A+ is important for the crowdfunding industry because it not only opens new opportunities but it also addresses key industry concerns.

Among these concerns was a concern that SEC would give into pressure from state securities regulators regarding the proposed rules. State securities regulators have been constant in their opposition to any and all proposals that would lessen the restrictions currently placed on crowdfunding. But the SEC remained firm on the proposed rules for Regulation A+, creating final rules that will let companies raise capital without meeting state-to-state compliance and spending exorbitant amounts in registering securities offerings.

The other critical crowdfunding concern that the final rules for Regulation A+ have addressed has to do with who should be allowed to invest in the public offerings. Initially, the JOBS Act set the limit for Regulation A+ offerings to only “qualified investors”. This resulted in a debate about whether only accredited investors would be allowed to invest.  However, under the final rules the definition of the term “qualified investors” has been expanded to include both accredited and non-accredited investors, subject to amount limits on non-accredited investors.

Compared to the newly adopted “accredited investor crowdfunding” under 506(c), which, for the most part, is currently occurring on crowdfunding platforms limited to accredited investors, e.g., AngelList, Funders Club, CircleUp, etc.  (although the law does not require the use of such platforms or even a platform at all, i.e.,. it can take place on one’s own website or even offline, if an issuer prefers), Reg A+ takes more time to launch an offering, and is more costly when you factor in legal fees, accounting costs, and annual reporting obligations. However, it enables a company to sell to non-accredited investors and creates a tradeable security upon issuance.

If you are interested in exploring how Regulation A+ can be put to good use on behalf of your own company, a proposed new startup or even in connection with the financing for a real estate purchase, contact us to learn more. Or, if you prefer, just click the image below and it’ll take you a PowerPoint presentation describing Regulation A+ and comparing it to other capital raising options that currently exist.