As of March 2015, the SEC has made it possible for anyone to participate in approved equity crowdfunding offerings, furthering the goals set out by the JOBS Act in 2012.
Regulation A+ is being celebrated as the first time in 80 years that the public can invest in equity offerings, a privilege which used to be exclusive to high net worth individuals (less than 1% of the US population).
High net worth individuals are generally those who have over $1 million in assets excluding their primary residence or or have an income of at least $200,000 each year for the last two years (or $300,000 with a spouse).
Now that amendments have been made to Regulation A, equity crowdfunding is available to the other 99% of the population (with limits). The new rules came into full effect on July 19 2015.
In May 2015, FundAthena became the first JOBS Act driven SEC Regulation A+ marketplace platform, whose goal is to reduce the funding gap for mid-sized, gender diverse businesses.
There are now others, like StartupEngine (look at how Elio Motors secured $35 million with them during their test the waters period).
If your company is in the startup phase and you want to pursue equity crowdfunding as an option, this post can help you decide if a Regulation A+ offering is right for you.
This post does is not intended to be financial advice and I’d recommend consulting an attorney and accountant before proceeding.
What is required by companies raising capital under Regulation A+?
To file a Regulation A+ offering, your company must be based in either the United States or Canada. OCT Markets reported that ineligible companies include those who are currently SEC reporting, as well as:
“Blank-check companies, funds required to register under the Investment Company Act, companies that are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights, and those whose SEC registration has been revoked within the past five years or who are disqualified under the “bad actor” qualification rules are not eligible.”
As mentioned above, your company should also be passed seed-stage funding (closer to a Series A round) and have a solid business plan.
Issuers filing a Regulation A+ offering have to submit their statements to the SEC electronically on EDGAR. All companies must complete required disclosures (using a combination of forms 1-A, S-1 and S-11) and provide independently audited financial statements. Offering statements need to be approved by the SEC before companies can make any sales under Regulation A+.
Pros
- Accredited and non-accredited investors can participate
- There are fewer limits on investment amounts: none for Tier 1 offerings and no more than 10% of the investor’s annual income or net worth for Tier 2 offerings
- Requires fewer regulations and disclosures than an IPO
- Companies can raise up to $20 million for Tier 1 or $50 million compared to only $5 million under Regulation A
Cons
- Can be a lengthy and expensive process
- Companies must still make a lot of disclosures
- Crowdfund Insider wrote about GroundFloor’s recent announcment that they were the first real estate crowdfunding platform to file for a Regulation A+ offering. They noted that it took at least 5 months for GroundFloor to get approved and “they spent $30,000 on auditing fees, $458,000 in legal fees, and $6,000 in blue skies fees. Those figures don’t include, for example, filing fees on Edgar or the internal costs or resources required to submit such a filing.” All of this was to sell only $545,000 in securities.
- Companies are not required to provide ongoing updates for Tier 1 offerings after filing their exit report (but are for Tier 2 offerings)
Conclusion
Regulation A+ makes equity crowdfunding available to millions of people, but still comes with a lot of restrictions. These restrictions are put in place for a reason of course; they are meant to protect investors, especially those who might not understand the risks involved. Unfortunately, some companies may be discouraged from pursuing this option, since it has been described as a long and expensive process. TechCrunch has noted that:
“Reg A offerings are not new — this small offering exemption has been available since the Securities Act of 1933 first became law. But the number of offerings qualified by the SEC dwindled in recent years, from 57 in 1998 to only 1 in 2011.
This week’s changes are intended to blow off the dust that had gathered on this sparsely used capital formation tool, and get it out of the regulatory muck.”
Another hurdle that Regulation A+ may have to overcome is the backlash from states (including Massachusetts and Montana) who believe that the SEC is wrong to remove the individual state review that was previously required for companies filing Regulation A offerings.
Right now, this change in SEC regulations will likely boost the number of companies filing under Regulation A+, but time will tell whether it will be a useful fundraising tool for mid-sized companies or more trouble than its worth.
For a deeper understanding of how to use Regulation A+ to your advantage, I highly recommend checking out our podcast episode with an expert in this space.
