Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012 expands the moribund Regulation A exemption by increasing the raise limit from $5 to $50 million. Non-accredited investors could participate in Reg A offerings before 2012, and they still can under Title IV but with certain limits.
In March 2015, the SEC issued final rules under Title IV, colloquially known as Regulation A+. Indeed, non-accredited investors can participate, with some limits. The rules went into effect in June 2015.
In addition to the expanded raise limit, Title IV preempts blue sky review (i.e., no need for approval by every state in which the offering is made) for “Tier 2” offerings over $20 million. Blue sky review is still required for “Tier 1” offerings under $20 million.
Some Regulation A+ offerings will be listed through online offering platforms. Such platforms may be dedicated to Reg A+ offerings, or they may feature a mix of Regulation D and Regulation A+ offerings. But Reg A+ offerings, like Reg D offerings, are not required to go through intermediaries. Moreover, Reg A+ offerings are allowed to “test the waters,” measuring potential interest by investors, before undertaking the obligations of an offering.
Even when a Reg A+ offering gets listed on an online platform (like EarlyShares), the issuer has no obligation to conduct any sort of Q&A forum or chat with potential investors, as will be required on Title III equity crowdfunding portals.
Before the JOBS Act, Regulation A issuers could sell unrestricted securities to non-accredited as well as accredited investors. The expanded Reg A+ still lets non-accredited investors participate, but it limits their annual investment in offerings above the $20 million threshold to 10 percent of their income or net worth, whichever is greater. All investors can invest an unlimited amount in offerings up to $20 million.
By contrast, the offering platforms that list Reg D offerings, under Rules 506(b) and 506(c), are open only to accredited investors. Platforms that feature intrastate offerings (under Section 3(a)(11) of the Securities Act of 1933) are open to accredited and non-accredited investors alike, but only in two dozen or so states and the District of Columbia—the number of states is growing.
There has been much confusion in the media about Reg A+, as some reporters have referred to it as “an opportunity for non-accredited investors to buy equity in startups.” In fact, Title IV was originally structured mainly for growth- and later-stage companies that are not quite ready to file IPOs. New York securities lawyer Brian Korn calls Reg A+ the “minor leagues for IPOs,” and others refer to it as the “mini-IPO,” as issuers are required to go through a “scaled-down registration” process and file a prospectus-like document called an “offering circular” with the SEC. The benefits of Reg A+ for seed-stage and startup companies seem limited mainly because Tier 1 offerings up to $20 million still require blue sky review and compliance, which can be costly and time-consuming. Time will tell whether seed-stage companies try to take advantage of Reg A+ rather than (or in addition to) Reg D, intrastate, or Title III equity crowdfunding.
Looking ahead, it is possible that Reg. A+ will work alongside rather than overlap with Title III equity crowdfunding and Reg D offerings, to provide a seamless progression of capital-raising options for companies, from early seed-stage startups using Title III, on to early growth-stage companies fueling expansion with Reg D, and then to Reg. A+ for pre-IPO later growth.
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David M. Freedman has worked as a financial and legal journalist since 1978. He has served on the editorial staffs of business, trade and professional journals, most recently as senior editor of The Value Examiner (National Association of Certified Valuators and Analysts). He is coauthor of Equity Crowdfunding for Investors, published in June 2015 by…
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