Changes to Regulation A+ by Conrad Everhard
On March 25, 2015, the SEC announced that it has adopted final rules in the implementation of Title IV of the JOBS Act, known as “Regulation A+,” which will allow small businesses and startups to raise up to $50 million in simplified IPOs.
Reg A+ is designed to fix Regulation A, a rarely-used provision of the JOBS Act, that allows companies to raise up to $5 million in modified offerings. The problem with Regulation A is that it requires issuers to register their offerings under the “Blue Sky” laws of each state where securities are proposed to be sold. This makes the cost of complying with Regulation A economically unfeasible. Under the SEC’s rules for Regulation A+, the amount that can be raised has been increased to $50 million and, most significantly, the need for state Blue Sky compliance has been eliminated.
There are two other major benefits of Regulation A+. First, issuers will be allowed to “test the waters” of investors before being required to make any public disclosure. This could save costs as compared to an IPO as some issuers will not go forward with an offering if investors do not seem interested and sensitive information will be protected from public dissemination if the issuer decides not to proceed. Secondly, Reg A+ offerings are not limited to “accredited investors”. Under Reg A+, issuers will be allowed to raise capital from retail investors so long as they meet certain qualifications (the rules only allow non-accredited investors to invest 10 percent of the greater of their annual income or net worth in these securities).
Issuers wishing to make a Regulation A+ offering will have to file an offering statement (including audited financial statements) which will be reviewed and qualified by the SEC. They will also be subject to ongoing public reporting requirements, although not as robust as apply to public companies on normal track.
Regulation A+ provides an interesting alternative for private companies seeking to access the public markets without all of the costs and burdens associated with going public. Reg A+ allows issuers to raise capital from retail investors at presumably higher valuations without giving up the control rights that they would be required to relinquish in a typical venture capital or private equity transaction. However, there are significant costs and on-going reporting requirements involving in using Reg A+. Issuers will also want to get a level of comfort from their bankers that they will be able to generate a secondary market for the resale of their Reg A+ securities. Retail investors, potential acquisition candidates and stock option plan participants and are not going to be interested in acquiring illiquid securities without a market.
Is the new Reg A+ is right for you? Each issuer will have to look to see whether using Reg A+ outweighs the benefits of the other options, including (1) going IPO the traditional way, (2) raising private funding from venture capital funds or other accredited investors in a private offering or (3) using a crowdfunding platform.
Conrad Everhard is a seasoned corporate and transactional attorney with over twenty years of big law firm and general counsel experience. Conrad counsels his clients on business matters at every stage of their life cycles, including start-up formation, strategic planning, executive compensation, corporate governance, mergers and acquisitions and all forms of venture capital and private equity transactions.Share
The VLP Speaks blog is made available for educational purposes only, to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site, you understand and acknowledge that no attorney-client relationship is formed between you and VLP Law Group LLP, nor should any such relationship be implied. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.