There are many attractive features associated with Reg A+ that have a host of people giddy for it’s potential success. As we’ve seen, the pool of high quality candidates is very limited . It gives you the ability to raise up to $50 million; non-accredited investors (in other words, those not considered to be wealthy) will be able to invest; every state in the union is preempted from regulating a Tier II securities offering.
Among these benefits, perhaps the most attractive and useful (at least at this moment) is your ability to test the waters through social media, the Internet, and other advertising. Considering how costly securities offerings can be, it’s fiscally responsible and wise to be able to test the market to determine the level of interest that exists, prior to making a substantial financial commitment of a securities offering.
What and how can you test the waters of Reg A+?
Under Reg A, the SEC allows you to test solicitation materials prior to any official state or SEC filing. This includes:
• Engaging in general solicitation without pre-reporting to the SEC
• Targeting prospective investors (including non-accredited and accredited investors)
• The freedom for issuers to advertise on their own (without the need for a broker/dealer or platform)
• Investors are able to express a nonbinding interest in a security offering
While the expressed interest by an investor is nonbinding, it still provides issuers with a litmus test for general interest and the potential success of the offering. Any type of sale is prohibited, of course, until the SEC qualifies the offering.
Why the SEC allows you to test the waters
The SEC allows testing because it believes there is enough protection put into place for the investor, including:
• The requirement to include legends or disclaimers
• Providing a statement declaring that any expressed interest is nonbinding (and cannot proceed prior to qualification)
All testing the water materials must be filed alongside Form 1-A, which allows the SEC to review and comment on these materials, as well as require changes as needed.
This filing requirement makes these materials open to public scrutiny, including lawyers, the press and others. The materials are subject to anti-fraud provisions as well, which helps to encourage issuers to advertise their offering with full disclosure.
In an effort to prevent the public – or investors – from being misled, the SEC can require an issuer to redistribute revised solicitation materials if it discovers any inaccurate or inadequate information.
Explore investor interest before paying larger offering expenses
Testing the waters allows issuers to determine the level of investor interest in an offering, without having to commit to the expenses associated with a securities offering. This provides the issuer with an opportunity to determine whether Reg A – a less expensive route than a traditional IPO – is the ideal strategy to employ for business growth. But, as you prepare your testing the waters materials, keep in mind that these materials must be filed with the SEC and are subject to public and regulatory scrutiny.