The March 25 news that the SEC approved changes to Regulation A generated a lot of chatter, especially in the startup scene. When the new Regulation A+ rules take effect, as expected this summer, it essentially will create a new kind of ‘IPO-Lite’: a way for companies to go public with less initial and ongoing expense compared to a real IPO.
Three years after the 2012 JOBS Act, and following the changes made to SEC Regulation D in 2013, we’re now seeing a new way for private companies to raise money, from both sophisticated and Main Street investors.
What is new about Reg A+? And what kinds of companies will it work for? At Venovate, we created a handy table that sums up the various similarities and differences between raising capital under Reg D vs. Reg A+. In this Forbes article, I’m zooming in on 5 key aspects of Reg A+ in particular.
Reg A+ comes in two flavors
The old Reg A had such a low fundraising limit and high compliance cost that it was almost never used - Ben & Jerry’s being the notable exception back in the 1980s. Companies could only raise up to $5 million in capital, and they had to file the offering in every state in which they were selling (the so-called ‘blue sky laws’). The new Reg A+ raises that limit to $20 million for the existing Tier 1, and creates a new Tier 2, in which companies can raise up to $50 million, $15 million of which can be offered by current shareholders. In addition, Tier 2 will not require companies to be reviewed by every state, significantly reducing the cost of compliance.
Reg A+ is not for everyone
As with any new development, there’s already been a lot of debate about how game changing the new Reg A+ will be. The new opportunities the SEC has created certainly won’t work for every company.
I believe that Reg A+ will prove to be the right solution for certain companies, particularly in a later stage in their growth trajectory, by providing an intermediate step between traditional venture capital funding and going public. Yet, I don’t think Reg A+ is necessarily the appropriate fundraising option for early stage startups. Why not?
Reg A+ offerings come with responsibilities
Although the Reg A+ preparation, filing, and reporting requirements aren’t as rigorous as those for a real IPO, they are a significant step beyond the business plans and budgets startups typically show angel investors or VC firms. For some companies, meeting these requirements will be too expensive or too time-consuming to be practical. That’s why I believe the new Reg A+ option will be most useful for a mature, later stage private company that is prepared to do the work and take the time required for this more formal type of offering, and, in the case of a company making a Tier 2 offering, prepared to meet the SEC’s ongoing reporting requirements.
Companies that decide to go through this process will be able to “test the waters” by promoting their potential offering before they undertake the time-intensive process of creating a full offering statement. Of course, there will be rules regarding what can and can’t be said during this preliminary testing phase, so working with a securities specialist to review all communications will be essential. When a company does decide to move forward with a Reg A+ offering, they’ll need to file with the SEC and, in the case of a Tier 2 offering, provide audited financials. Going forward, they’ll also have to file ongoing financial reports.
Reg A+ offerings cost time and money
Obviously, the requirements described above will cost both time and money. For instance, the disclosure requirements are lighter than those for an IPO S-1, but they’re still significant. I expect that the process of SEC review will take several months from start to finish.
In addition, the cost of providing audited financial statements for small and medium-sized enterprises (SMEs) lies between $5,000 and $75,000, as estimated by The Wall Street Journal back in 2011. Legal fees will also add to the cost of the process.
Altogether, the total cost of a Reg A+ offering is likely to be in the range of high five to low six figures. Still, that is relatively modest compared to an IPO, which costs well over a million dollars according to PWC data.
Reg A+ opportunities are not just for ‘accredited investors’
Despite the popularity of the term ‘crowdfunding,’ by law private securities aren’t really accessible to the investing crowd. As defined by the SEC, to invest in private securities you have to be an ‘accredited investor,’ which for an individual means you need to meet one or both of the following criteria: 1) Net worth in excess of $1 million, excluding the equity in a personal residence. 2) Income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000.
These criteria still apply to private placements that fall under Reg D, yet under the new Reg A+ rules private securities can also be bought by ordinary, non-accredited investors, as long as the investment does not exceed 10% of the investor’s income or liquid net worth (self-certified). In addition, shares are not restricted, so they can be resold in secondary transactions, opening up the possibility of more liquidity for existing shareholders.
Altogether, there are significant benefits to a Reg A+ offering, which will make it an attractive option for later stage growth companies. Reg A+ allows companies to advertise their offerings in public, and raise money from both accredited and non-accredited investors. Securities sold through Reg A+ are unrestricted, meaning they can be resold. For many companies, the opportunity to get liquidity for early-stage investors, create a (small) secondary market for their shares, and test their company’s appeal to Main Street investors will be attractive enough that the time and cost of putting together an offering will be worth it.
This means that Reg A+ can truly become an intermediate step on the road to going public. And the process of putting together this type of offering, complete with audited financials, could actually help companies prepare for a future IPO.
As you’re gaining a better understanding of the nuances of Reg A+, you may consider this option for your company’s next fundraise. So, what step to take now? In a follow-up article I will break down in more detail the process of creating and promoting a Reg A+ offering, for instance with the help of an alternative investing platform and broker-dealer like Venovate Marketplace.
