Entrepreneur's Guide To Regulation A+
Wednesday, May 18, 2016
In 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act greatly expanded entrepreneurs’ access to capital by allowing them, under certain circumstances, to solicit capital investment more widely. The JOBS Act mandated two SEC rule updates and expansions – Expansion of Regulation D under Title II (which you can read more about here), and Expansion of Regulation A under Title IV. The hope is that these new rules will have a positive impact on the U.S. economy since 65% of new jobs are created by small businesses.
Reg. A is the longstanding SEC rule that allows companies to offer and sell securities to the public, but with more limited disclosure requirements than those of publicly reporting companies. While this would seem to appeal to smaller companies in early stages of development, few companies take advantage of it, mainly due to such burdensome requirements for an offering that is capped at $5 million. As a result of the JOBS Act mandate, in 2015 the SEC amended Reg. A to create a new exemption from registration called Reg. A+. Under Reg. A+ companies can raise up to $50 million. Reg. A+ has two Tiers, with requirements as follows:
In many ways, Reg. A+ is middle ground between a traditional fundraising under Reg. D and an IPO; some even call a Reg. A+ offering a “mini IPO.” Similar to an IPO, Reg. A+ allows companies to raise capital from all investors and it requires a degree of regulatory review. However, fees associated with a Reg. A+ offering are expected to be much lower than a traditional IPO, and ongoing disclosure requirements are much less burdensome.
Reg. A+ issuers may also “test the waters” before committing to a financing. This allows companies to gauge the potential success of a Reg. A+ offering and decide whether or not to move forward prior to spending time and money on the SEC approval process.
Elio Motors is the first company to raise equity and go public under Reg. A+. In this deal, which closed in February 2016, the company raised over $16 million in funding. Further information on the deal can be found here.
While some companies are dipping toes in the water, several questions remain. Can small, early stage companies afford Reg. A+? Or, did the SEC simply make cheaper for middle and late stage companies to execute public offerings? So far, it looks like the latter might be true.
Bob Zeglarski can be reached at 615-933-3545 or via email at email@example.com. Cutwater Law provides legal services to the creative industries. Clients include small and medium-sized businesses, and entrepreneurs in tech, television, film, music, publishing, and digital media.