Back on June 19th, 2015, the US Securities and Exchange Commission (SEC) approved an amendment to Regulation A which allowed companies to raise up to $50 million dollars in capital in a 12-month time-frame. Dubbed by many a “mini-IPO” or an “IPOtogo”, the newly termed Reg.A+ was significant because it allows these companies to raise money quickly from both accredited and non-accredited investors without the requirements of a traditional IPO.
Its basis is in the Jobs Act of 2012, which was a bill passed to stimulate economic growth and U.S. job creation by lessening access requirements to capital markets for small businesses. As with most new things, Regulation A+ started out slowly but has been steadily gaining momentum as the vehicle of choice for equity crowdfunding. Any U.S. or Canadian company is eligible to create a Reg.A+ offering if they are not already subject to on-going reporting requirements of the Securities Exchange Act of 1934 or that has not failed to file reports required by Regulation A over the last two years of their existence.
In addition, there are two tiers of Reg.A+ equity crowdfunding, each with different requirements. Most importantly, each Tier allows general solicitation to the public over the internet and social media, allowing businesses access to an investor base previously not available. This is a huge reason why Reg.A has been so enticing to businesses of all sizes.
A company doing a Tier 1 Offering can raise up to $20 million dollars in a 12-month period, with ongoing requirements to file with the SEC until the offering is complete. Blue Sky laws in each state come into play with a Tier 1 Reg.A+, which is not an easy (or cheap) process, making Tier 2 a somewhat more attractive play. Tier 2 allows an issuer to raise up to $50 million in a 12-month period. Other than restrictions on the amount of an investment can be made by non-accredited investors, Tier 2 seems to be the more popular choice based on administrative costs and faster time-frames.
Because of all the benefits of a Regulation A+ offering compared to a traditional IPO, many issuers have commented that Reg.A+ is a dream come true! However, Regulation A+ is not an inexpensive process and it does take some time for an offer to be qualified with the SEC. There are significant costs involved. Legal fees on the high side can range between $75-150K just to file a “Form 1-A” with the SEC. In addition, there are marketing costs to address your target audience including term sheets, sales literature, press releases and presentation documents which all must look professional and make investment sense. Then there’s the company’s liability exposure to their Regulation A+ offering, since many investors harnessed over social media may be non-accredited and/or unsophisticated. Here are some other items that issuers must consider:
- Is their management team experienced enough to handle all the Reg.A red tape and filing requirements?
- Will a “testing the waters” phase be used before deciding to commit to a full blown offering campaign?
- Will the company require future rounds of financing after the Regulation A+ offering is complete?
- Will the company enlist the help of a broker-dealer or offer their securities directly to the public themselves?
Many Reg.A+ issuers are choosing to hire consultative service companies that are able to save companies a significant amount of money by aggregating these required services These companies have strong relationships with highly experienced SEC attorneys, auditors, transfer agents, broker dealers, and marketing agencies – all of which work seamlessly to help make a Regulation A+ offering a success, without costing an arm and a leg!
As of this writing, 32 companies have successfully qualified their Reg.A+ offering with the SEC. They will all tell you that Regulation A+ is, in fact, the real deal! All you need to do is align yourself with industry experts with the talent, knowledge, and drive to help position your Regulation A+ offering to the forefront of those interested in the type of deal you’re offering to them. Easy? No… but REAL? Absolutely!