**Note: If you’re seeking assistance with your Tier 2, RegA+ offering, please contact us. We can directly assist.
One of the primary purposes of the JOBS Act was to grease the proverbial skids for raising capital for small and medium-sized businesses. Understanding how the new rules work will be helpful as you may attempt to use the benefits of the new regulation to benefit your next great business idea. As the law stands currently, the original Regulation A allows for $5MM in a single raise over a 12 month period with as much as $1.5MM put up for resale. Typical RegA excludes shell companies and requires limited disclosure, as opposed to an IPO. Companies pursuing a RegA offering will be required to submit a Q&A disclosure statement structured similar to an S-1 which is completed prior to an IPO or APO. The RegA does not require initial or ongoing audit or reporting, however it does require that the offering meets the specific guidelines of various states, which can differ widely. If a nationwide RegA offering is intended, then the costs of compliance can actually prove quite onerous.
We often speak a great deal about Titles I, II & III, but Title IV of the JOBS Act (what is often referred to as RegA+) throws an interesting twist in the options and opportunities for crowdfund offerings. It bumps the limit from $5MM to $50MM, pushes the length of time out to two years and eliminates the need for state-by-state compliance when security sales are made to “qualified investors.” Unfortunately, we don’t yet completely know what that means, but we do know that the state compliance is given as a trade-off because companies offering in a RegA+ offering are required to have audited financials and regular reporting. States would still help to enforce the rules laid out by the SEC.
Under the new rules companies seeking to perform an offering under Title IV (or in other words Direct Public Offering +) would be subject to all the full narrative and disclosure statement of an IPO or APO (reverse merger + PIPE) with the exception of the insider, proxy or tender offer reports. Another limitation of such an offering is that the total amount raised from the qualified individuals in the offering cannot exceed 10% of their annual income. Some have claimed this rule may prove problematic for institutional investors, but as the rules are not set for what is deemed as a “qualified” investor, it is assumed this will eventually work itself out.
In discussing Title IV or the new RegA+, it is important to note that RegA will not cease to exist as an option for companies seeking to raise money in a Direct Public Offering. The two types of RegA are now deemed Title IV Tier I (typical RegA) and Tier II (RegA+ with its new associated rules).
RegA+ vs. IPO vs. APO/Reverse Merger
Certainly for the right issuer, a RegA+ offering may have increased interest over a traditional IPO, due in part to its significant cost savings and limited disclosure requirements. Less state disclosure requirements and somewhat limited total disclosures, including the ability to keep things quiet on the financials during a road show and pitch before any filings are required to become public. To be more specific, the company can keep disclosure quite for up to 21 days before the SEC approves the filing. This has the benefit of allowing a potential issuer to “test the waters” of the offering.
Regulation A+ is somewhere between an IPO a APO and may prove helpful in the financing of deals that require less than $50MM and don’t necessarily want to go through the process of buying or manufacturing a shell in a reverse merger scenario. It further bifurcates the options for raising capital, which isn’t necessarily a bad thing. Creating a hybrid approach to raising money creates more opportunity for those who’re actively seeking financing. I really like what Cydney Posner of Cooley says:
So will Reg A+ have any appeal? According to the economist from the Division of Economic and Risk Analysis, the new exemption has the potential to expand access to sources of capital without imposing the full compliance that would be required by registration. At the same, the continued reporting requirements could promote the development of secondary trading markets for these securities. Ultimately, companies considering the exemption will need to assess and balance the costs of use of the exemption as compared to an IPO (less liquid market v. lower costs of compliance) or Reg D (greater costs v. access to more dispersed investor base.) It remains to be seen whether Reg A+, assuming adoption, will be enough to detoxify the Reg A “stew of impediments” and attract any issuers.
In any event, the laws themselves are wholly outdated and need a drastic reset for a number of reasons. In fact, fewer than 10 companies a year over the last several years have even opted for the RegA route, which shows at least the symptoms of a much more widespread disease in the realms of raising capital. The regulators have been in a bit of limbo over the last couple of years since the JOBS Act was implemented as they are, as always, seeking to strike that delicate balance between protecting investors and greasing the skids on burdensome regulation required for raising capital for small business.