We’ve recently shared some background about the regulatory changes surrounding the JOBS Act with you but it’s the most recent change, Title IV Regulation A+, that has the potential to create the greatest impact for startups and crowdfunding platforms.
As noted by SEC Chair May Jo White in March 2015, “These new rules provide an effective, workable path to raising capital that also provides strong investor protections. It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
Refresh My Memory. What is the JOBS Act?
The Jumpstart Our Business Startups Act, or the JOBS Act, eased securities regulations to encourage the private funding of U.S. small businesses. The JOBS Act made the process of raising capital potentially simpler, cheaper, and faster, and it eventually made crowdfunding possible. As the Act continued to evolve, it allowed more investors to participate in equity capital contributions to private companies. What historically was only accessible for wealthy, accredited investors, has become available to almost all investors, accredited or not.
What is Regulation A+?
Title IV of the JOBS Act known as Regulation A+, or Reg A+, is part of the evolution of the JOBS Act. It launched in May 2015 after a long wait and great anticipation. Reg A+ refers to an exemption that allows small companies to sell their shares to the general public, making it possible for almost anyone to invest in a business through crowdfunding. It enables startups and crowdfunding platforms to raise money from both accredited and non-accredited investors – for the public to invest in private companies. It also enables companies seeking equity funding to publicly advertise their offerings. It has helped create an effective way for companies to raise capital while also providing investor protection.
The biggest difference between Reg A+ and other exemptions that were previously available for security issuers is the audience. Most of exemptions that were previously available allowed companies to accept investment from accredited investors only, while Reg A+ allows all investors to participate, acting like a mini-IPO.
How Do Regulation A+ Offerings Work?
Regulation A+ is broken up into Tiers I and II. Here’s a quick overview of the key differences between the two:
- With Tier I, eligible U.S. and Canada-based companies are able to offer and sell up to $20 million in equity. The previous limitation was $5 million. The company must pass a state coordinated review and their financials are subject to ongoing compliance. There are no limitations to the size of an investment in the company.
- With Tier II, eligible U.S. and Canada-based companies are able to offer and sell up to $50 million in equity. Non-accredited investors have caps on how much they can invest. They can invest a maximum of 10% their annual income/net worth per year, depending on which is greater. Tier II offerings are also required to maintain audited financials and annual reporting requirements.
For Tier II, perhaps one of the biggest changes under Regulation A+ has been the pre-emption on Blue Sky Laws. In short, this removes the requirements to register the offering in each state where a company sells their securities to qualified purchasers. The pre-emption of state law means Tier II is typically the favored tier of Reg A+ for startups and small businesses.
Are There Pros and Cons to Raising Equity Through RegA+?
Like any new regulatory change, there are benefits and obstacles to raising assets through crowdfunding. One of the biggest advantages for companies seeking to raise capital through crowdfunding is that it is far less complicated and costly than an initial public offering (IPO) – requiring fewer regulations and disclosures. Another potential positive is that the amount of money a company can raise has grown significantly and there are fewer limits on the investment amounts from individuals.
Conversely, crowdfunding can be a lengthy and expensive process for young companies trying to grow quickly while maintaining low start-up costs. And, although the process is not as complicated as an IPO, it does require an approval process that can result in hefty filing, insurance, and legal fees.
A report released by Crowdfund Insider in July 2016, revealed that over 100 Reg A+ filings were submitted to the SEC over the year following the rule becoming effective, with the real estate industry coming out in full force to utilize the new regulations to raise funds for real estate projects and fund. For us, Reg A+ was another exciting opportunity to continue to increase investor access to commercial real estate investment opportunities, which is why we launched our first online REIT.
What Does the Future Hold?
While we certainly don’t lay claim to a crystal ball, there is no doubt that crowdfunding is changing the market and the opportunity set for anybody seeking to raise capital. As a result of Reg A+, startups no longer need to rely solely upon angel and venture capital backers to get their businesses off the ground, and crowdfunding platforms have a larger prospective audience to work with. Crowdfunding has taken the process of raising assets online and marketing and distribution channels have expanded as a result. Title IV and Reg A+ have created a new breed of investors with potentially greater prospects and a shareholder’s stake in their investment.