On June 19, Regulation A+ will go into effect, replacing Regulation A under Section 3(b) of the Securities Act. Regulation A allowed issuers to raise up to $5 million in a 12-month period through the sale of securities to both accredited and unaccredited investors. To accept this type of investment, an issuer was required to complete a “mini-registration” with the SEC and comply with state requirements. The “mini-registration” was intended to be less onerous than a regular IPO.
With fewer restrictions and simpler filing requirements, the new rules have the potential to allow entrepreneurs to raise more money much more easily than under the previous regulations. Below we examine what these changes mean for your business and how you can take advantage of the new regulations.
Before We Begin: Key Terms You Need to Know
- Accredited Investor vs. Unaccredited Investor: An accredited investor meets income and net worth requirements. They have earned at least $200,000 in each of the last two years or have a net worth of over $1 million. These investors have a special status under SEC regulations and are assumed to have the necessary financial sophistication to take on certain kinds of risks. Some types of financial offerings are restricted to accredited investors. Unaccredited investors refers to all other investors who previously were excluded from certain types of investments.
- Regular IPO: An initial public offering (IPO) is an offering in which shares of a company’s stock are sold, often first to institutional investors, and then to the general public on a securities exchange. A private company becomes a public company through its IPO. In order to conduct an IPO, a company is required to register with the Securities and Exchange Commission (SEC), an extremely complicated process which can cost hundreds of thousands of dollars.
- Mini IPO: A “mini-IPO” is a public offering with simplified requirements for companies offering securities that was first made available under the original Regulation A federal securities exemption. Issuers must still go through a registration process, but it is less complicated than that of a regular IPO. They will also need to file an offering circular with the SEC, which is similar to a prospectus. Finally, their financial statements are simpler and do not need to be audited.
- Blue Sky Laws: Blue Sky Laws arestate laws that regulate the offering and sale of securities. The laws vary between states, but they generally require companies that are making offerings of securities to register their offerings in a state before they can be sold there.
What Will Change: Regulation A+
The SEC issued final rules under Title IV of the Jumpstart Our Business Startups (“JOBS”) Act of 2012, amending Regulation A. These new rules, known as Regulation A+, increased the threshold for fundraising under Regulation A to $50 million through two Tiers in a 12-month period. These are the rules coming into effect on June 19. The two fundraising Tiers differ in their annual fundraising threshold, as well as state registration requirements.
Tier 1:
- Who: Companies that anticipate raising up to $20 million in a 12-month period from accredited and non-accredited investors.
- What is Required: Companies must file their offerings and comply with requirements in every state in which they offer shares.
- Why Do I Care: The major difference between this and the old Regulation A rules is the monetary cap -- a $15 million dollar increase in the amount you can raise.
Tier 2:
- Who: Companies that anticipate raising between $20 million and $50 million in a 12-month period
- What is Required: These companies are exempt from state-by-state registration requirements, or Blue Sky Laws. However, in a Tier 2 offering, non-accredited investors can only purchase up to 10% of the greater of the investor’s annual income or net worth.
- Why Do I Care: In addition to the monetary cap ($45 million more than previously permitted!), exemption from the state-by-state registration is an administrative and financial relief.
The “mini” SEC registration is still a requirement for both Tier 1 and Tier 2 offerings. However, companies may now “test the waters” before beginning the registration process through solicitations or promotion of a potential offering. While a company may not accept any investments during this phase, this can be a useful opportunity to gauge if the time and expense of an SEC registration will be worth it.
What Does This Mean for You?
Your company may now raise much more money through the sale of securities than previously possible. Furthermore, if you are ready to go in for the big raise and anticipate offering over $20 million in securities in the coming year, your regulatory burden will be greatly reduced. Finally, through solicitation of investors during the “testing the waters” phase, you will be able to make a more informed decision about when to proceed with your fundraising. By making it significantly easier to raise capital for your company, Regulation A+ will allow you to jump start your business and rapidly grow your company.
How a Lawyer Can Help
If you are ready to launch your company’s fundraising campaign, a lawyer can help you navigate the new regulations and make sure you get the most out of today’s new fundraising tools. From structuring your investments to complying with all financial disclosure requirements, working with a skilled business lawyer can help make the fundraising process run smoothly.
