Regulation A+ became law in June with the promise of small businesses having the ability to raise $50 million through an online mini initial public offering. The novel concept of a young company being funded by the general public and having “the crowd” -- not just accredited investors -- invest online could revolutionize the capital-formation process in America.
As an attorney whose practice revolves around obtaining funding for small businesses, potential clients ask me every day if Regulation A+ is a good fit for their business. The answer is always that it depends.
To help explain, I called upon a man at the forefront of the Regulation A+ industry, Scott Purcell. Purcell is the founder and CEO of FundAmerica Technologies, which provides a bevy of services to those who make a business of online capital formation pursuant to JOBS Act equity crowdfunding.
Regulation A+ “is best suited for those companies who want or need non-accredited investors," Purcell says. "It could be just a way to raise capital, or, more appropriately, it could be part of a larger branding and marketing plan. For everyone else, it probably makes more sense to stick with Regulation D.”
That being said, let’s go through some of the typical reasons companies give me for wanting to use Regulation A+:
1. “I need funding for my startup.”
Raising funds through Regulation A+ is not cheap. While a Reg A+ mini IPO could be a financial bonanza for a startup, there are legal fees, compliance fees, regulatory fees, accounting fees and broker-dealer fees to pay. This is not a Kickstarter campaign. This is selling securities, and the SEC has to approve your offering, which costs money. Also, you must have a budget to market the offering or in all likelihood the offering will not raise much money.
While there certainly are exceptions, and entrepreneurial-minded attorneys and accountants can help lower costs, most companies can expect to pay a minimum of $100,000 to cover these necessary expenses and plan on three or four months of time to prepare and file the regulatory forms before you can start fundraising. That puts it out of reach for most startups.
2. “I want to raise $50 million.”
Regulation A+ lets you raise up to $50 million online, but you can do the same thing with a private placement (or even raise more, as those securities offerings are not capped at $50 million) under Section 506(b) or 506(c) of Regulation D for far less money in a far quicker timeframe and with far less hassle. The problem with private placements is you lose access to the masses as potential investors and you are mostly limited to raising money from wealthy accredited investors.
3. “I want my securities to be liquid and tradable.”
Regulation A+ securities are freely tradable, but at this time there really isn’t a marketplace where they can easily be listed. However, we are close to seeing alternative exchanges come to fruition where investors will be able to sell and buy Regulation A+ securities.
You can list your Regulation A+ securities on OTC or NASDAQ, but Purcell notes, “You need to get a CUSIP number, get your securities DTC qualified, go through the steps to get your securities listed on the desired exchange, find market makers and research coverage for your securities and to commit to additional reporting and costs in addition to your SEC and state obligations.”
“Do I need a broker-dealer to do this, or can we do it on our own?"
While the JOBS Act itself does not mandate the need for a broker-dealer for a mini IPO, there are other laws and rules that would put a company in potentially hot water if it does not utilize a broker-dealer to sell Regulation A+ securities, even to investors who come from a company’s own marketing efforts.
“Securities issued via Regulation A+ tier 2 are exempt from state blue sky (laws that regulate the offering and sale of securities) review," Purcell says. "This, to issuers and investors, is one of the best features of the new rules. However many states are very unhappy about it.”
Purcell is referring to the fact that while state officials are angry they no longer have blue sky review of securities sold in their states, each state still has the right to decide who is allowed to sell securities to their residents. While there is no national uniformity, we know that many states will require the agents of companies raising funds in Regulation A+ offerings to register as brokers and to have appropriate securities licenses. What happens if a company sells securities in one of these states without being licensed?
“Ouch,” Purcell says. “States have tools in their arsenal to make life miserable for issuers and to levy fines and force rescissions of completed offerings if the sales are made through anyone other than a licensed broker-dealer.”