Back in March, I wrote about proposed revisions to Regulation A, commonly known as “Regulation A+”, which were designed to implement Section 401 of the Jumpstart Our Business Startups Act (JOBS Act). Since then, the SEC issued its final rule, which went into effect earlier in the month. Back in March, I had two main thoughts regarding the proposed rule. First, by proposing that Regulation A+ offerings preempt state registration requirements, the SEC had proposed a securities exemption that may actually prove useful and had a chance to be used in the real world (as opposed to the old Regulation A, which was rarely used). While this aspect of the proposed rule would be attractive to companies raising capital, it would also be controversial with state regulators and investor advocates, so I was concerned that in the final rule preemption of state laws would be rolled back. Second, I was concerned that companies that used Regulation A+ would likely be subject to ongoing Securities Exchange Act reporting (as a fully public company would be), which would reduce the attractiveness of the exemption.
Thankfully, the final rule issued by the SEC reaches the right result (in my opinion at least) on both of these issues. The final rule retains preemption of state registration and exempts securities issued in a Regulation A+ offering from the Exchange Act reporting requirements, as long as the issuer engages the services of a transfer agent, complies with the reporting requirements in Regulation A+, and has a public float of less than $75 million or in the absence of a public float, has annual revenues of less than $50 million. When one of these two triggers is hit, the issuer will need to register as an Exchange Act reporting company within two years. Nonetheless, the ability to comply with the less onerous Regulation A reporting requirements instead of the Exchange Act reporting requirements for a period of time may make Regulation A+ and attractive option.
While I am happy with the resulting final regulations, I’ve seen a lot over coverage in technology press and startup blogs that contains a lot exaggerated claims. Just a few examples:
- SEC allows regular Americans to become venture capitalists, no Silicon Valley cred required
- SEC Democratizes Equity Crowdfunding With JOBS Act Title IV
- F-U-N-D-E-D: New rules mean you, too, can be a startup owner
- New JOBS Act Regulation A+ Will Be A Game Changer
While there are a lot of people very excited about Regulation A+ and its possibilities, the reality is much more modest. Here are some of the common questions I receive from clients and potential clients about Regulation A+ and the answers I give in response:
What does Regulation A+ mean for startups?
The best way to describe Regulation A+ is that it is a mini-IPO. The process is very similar to an IPO, in that the company must file a disclosure document with the SEC and be subject to an SEC comment process. The disclosure document has mandated items that must be addressed and assembling all of this will likely be expensive (but not as expensive as an IPO). But the disclosure is not as extensive as that required in an IPO and hence the process will not be as expensive.
Is this a game changer for startups looking to raise capital?
Probably not. Most of the people who ask this question are usually early stage startups looking to raise their first or second round. Regulation A+ is not really suited for these companies. For reasons described below, Regulation A+ is much more suited for late stage startups that have already raised some significant amounts of capital but are not ready for an IPO.
So who is this good for?
Regulation A+ is not likely to be suitable for an early stage company. Rather, it will most likely be useful for companies that have raised capital already, but now want to raise a significant amount of additional capital (up to $50 MM). They have the financial resources to hire the lawyers and accountants necessary to engage in the process of a Regulation A+ offering, but not the resources to engage in an IPO.
For more information, see the following article: Everyone Isn’t a Good Candidate for Reg A+
How much will using Regulation A+ cost?
It’s difficult to tell right now as it’s so new. But you can expect significant legal and accounting costs given the rigorous requirements imposed by the SEC. You can probably expect something in the range of $75,000 to $100,000 in offering costs. This is why Regulation A+ is most likely an unrealistic option of early stage startups.
For more information, see the following article: How Much Should Regulation A+ Cost?
How long will it take to get a Regulation A+ offering done?
At this point, expect 4-8 months before you can start raising money. Most early stage startups can’t wait that long, which is another reason why they should avoid this exemption.
For more information on what the process is like, see the following article: Fundrise CEO Ben Miller: New Reg A+ is a “Goldilocks” Change in Regulatory Environment
Does this mean we have some slack on limiting our capital raise to accredited investors?
No, absolutely not! Most startups raising capital are using an exemption called Rule 506 of Regulation D, which effectively requires all investors to be accredited investors. Regulation A+ does not change anything in this regard.
© 2015 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.