On June 19th, Title IV of the JOBS Act will finally become actionable for interested issuers. Commonly referred to as Regulation A+, or “Reg A+”, this portion of the JOBS Act may be best described as a mini-IPO. Reg A+ may be used by any US or Canadian company that is not public and may raise up to $50 million – not a small amount.
There has been an ongoing debate as to whether or not issuers will utilize this new exemption. Some believe the costs are prohibitive and many companies hoping to raise capital will stick with the tried and true Reg D private placement. Others believe Reg A+ will evolve into a more common crowdfunding tool, becoming another step in the capital ladder.
Sam Guzik, a securities attorney and Crowdfund Insider Senior Contributor, recently was quoted in the Economist on Reg A+. He posited that Reg A+ has much potential;
“Sam Guzik, a California lawyer, predicts many firms will take advantage of a “test the waters” provision in the rules allowing them to float the idea of an offering, discussing it with the media and investors, before paying to have a formal proposal prepared and reviewed by the Securities and Exchange Commission (SEC). In the past, it was feared that such marketing might allow small investors to be suckered by unsubstantiated hype.”
Reg A+ encountered a bump in the road late last month as the State of Massachusetts, along with Montana, filed a lawsuit against the SEC attacking Reg A+. Massachusetts has a long history of not being investor friendly as they were the one state that denied Apple to offer shares to residents for the IPO as they were “too risky”.
While Massachusetts fears the unknown, a University of Pennsylvania Professor believes concerns about fraud are blown out of proportion and cites rewards based crowdfunding as a leading indicator;
“… after reviewing more than two years’ worth of data, Ethan Mollick of the University of Pennsylvania concludes that fraud is almost non-existent at Kickstarter. The completion rate of projects that receive their desired level of funding is 86%, suggesting that commitments are largely honoured.”
“Mr. Mollick attributes this lack of fraud to what has become known as “Linus’s Law”, after the originator of Linux, a free computer operating system. He argued that mass vetting would quickly expose any glitches … Crowds, it appears, are attentive to details.”
The decline in small IPOs has been steady in recent years. Companies have avoided the time and money necessary to publicly list shares. Reg A+ crowdfunding may be a path for SMEs to issue shares to fund growing business while providing investment opportunity to small investors. But only time will tell if Reg A+ will be a broadly utilized exemption.
See below a list of FAQs on Reg A+ provided by Sam Guzik.
How Much Can a Company Raise?
Any amount up to $50 Million in a 12-month period may be raised in Regulation A+ offerings. However, money raised in other types of offerings, such as private placements, are not included in this $50 Million 12-month cap.
Can the Company’s Current Shareholders Sell their Shares in a Regulation A+ Offering?
Yes. But the aggregate amount sold by the shareholders who are “affiliates” may not exceed $15 million in a 12 month period. And for the initial Regulation A+ offering and during the first year following the company’s initial Regulation A+ offering, there is an additional limitation: selling shareholders may not account for more than 30% of the total dollar amount offered in the Regulation A+ offering. The aggregate amount sold by the Company and the shareholders may never exceed $50 Million in a 12 month period.
Note – Shareholders who are not affiliates and have held their shares for at least one year will generally be able to sell their shares under SEC Rule 144 without the need for any registration, though there may be some additional hoops to jump through.
Do I Need to Register the Offering With the SEC?
Yes. You will need to file an Offering Statement (Form 1-A) with the SEC, which will be reviewed by the SEC for compliance with SEC rules, similar to a traditional Registration Statement for an IPO. The Regulation A+ securities may not be sold to the public until the SEC approves the Offering Statement. The Offering Statement includes the Offering Circular required to be provided to Investors.
All filings by a Regulation A+ company are done on the SEC’s electronic filings system, known as EDGAR.
What Type of Financial Information is Included in the Offering Statement?
Audited Annual Financial Statements must be provided for the two fiscal years prior to the year of filing. Financial statements must be dated not more than nine months before the date of filing or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.
Financial statements must be prepared either in accordance with GAAP or PCAOB standards.
What Type of Non-Financial Information is Required in the Offering Statement?
The prospectus type disclosure is contained in Part II of the Offering Statement, referred to in Regulation A+ parlance as the Offering Circular. The required information is similar to what would be included in a traditional IPO registration statement, but the level of detail is reduced to scale to smaller issuers. This information includes such items as risk factors, dilution, the plan of distribution, selling security holders, if any, use of proceeds, business operations, management’s discussion and analysis of the presented financial information(MD&A), identification of directors and executive officers, compensation information, ownership information, and related party transactions
Who is Eligible to Audit the Financial Statements?
Unlike a fully reporting public company, a Company’s independent auditor need not be registered with the PCAOB.
Will the Company be Required to Register its Offering with any States?
No. A major feature of Regulation A+ is that companies that qualify their securities with the SEC are exempt from state “Blue Sky” laws. However, some states still may require notice filings, and states retain jurisdiction to enforce certain, including those requiring that offers and sales are not made through misrepresentations or omissions
Can a Company Solicit Non-Binding Indications of Interest Before Preparing and Filing an Offering Statement with the SEC?
Yes. The SEC rules allow a company to “test the waters” to solicit interest in the proposed offering before any filings are made with the SEC. This is an important feature of Regulation A+, as it provides an opportunity to reduce the risk of an unsuccessful offeringbefore incurring significant expenditures for attorneys and accountants.
Will the Company’s Offering Statement be Available to the Public as Soon as it is Submitted to the SEC?
The SEC’s rules allow a private company to submit its offering statement privately, so that it will not be visible to the public until a company determines to proceed with the offering.
Who Can Invest in a Regulation A+ Offering?
All investors, accredited and unaccredited, are eligible to purchase securities in a Regulation A+ offering. If a company lists on a national exchange such as Nasdaq immediately upon commencement of the offering, there are no limitations on how much may be invested in the offering. If a company does not list on a national exchange, unaccredited investors will be limited to the greater of 10% of their income or net worth (exclusive of principal residence), whichever is greater. There are no investment limitations for accredited investors. And there are no investment limitations for shares purchased after the offering in the secondary market.
Will the Shares Sold in a Regulation A+ Offering Be Freely Tradable?
Yes, unless the purchaser happens to be an “affiliate” of the Company. Being able to sell freely tradable shares is one of the major advantages of a Regulation A+ offering. Typically, shares sold privately in an unregistered transaction are generally not freely tradable and reflect a discounted price to the company reflecting this non-liquidity. And it is generally more difficult for a Company to sell shares which are not immediately transferable, especially early stage companies where there is no secondary trading market. So the ability of a company to sell freely tradable shares is one of the major benefits of Regulation A+ when compared to selling shares privately in an unregistered transaction.
Where Will Regulation A+ Shares Trade?
This will in most cases be determined by the Company. I expect that he large majority of Regulation A+ companies will not initially meet NYSE or Nasdaq listing requirements. Typically a company’s shares will be eligible for listing on the OTC Markets, which has a three-tiered market structure. Other alternative markets are expected to develop in the coming months and years to accommodate smaller, early stage public companies.
Will the Company be Required to File any Reports with the SEC after its Offering Statement is approved?
Yes. Regulation A+ requires companies to file periodic reports, though with less frequency and detail than a fully reporting company. A company must file an annual report (Form 1-K) with audited financial statements and a semi-annual report (Form 1-SA) with six months of unaudited financial statements. A company must also file reports for specified material events within four business days of their occurrence (Form 1-U).
If a Company Takes Advantage of Regulation A+, How and When Can it Become a Fully Reporting Company and Move up to a National Exchange?
As long as a company meets the listing requirements of a national exchange, such as Nasdaq or the NYSE, a company can “uplist” at any time after its initial Regulation A+ offering by making an additional filing with the SEC to register as a fully reporting company. National exchange rules require that a company become fully reporting as a condition of listing. It is also possible for a company that meets exchange listing requirements to list simultaneously with the initial Regulation A+ offering.
When is a Regulation A+ Company Required to Become a Fully Reporting Company?
Generally, when any company has (1) more than 500 unaccredited shareholders of record, or 2,000 shareholders of record, and (2) at least $10 million in assets, it is required to file periodic reports with the SEC (e.g. Form 10-K’s and 10-Q’s). Note that this is calculated based upon record ownership of the shares, not beneficial ownership. If the shares are registered with a broker in “street name”, they are typically aggregated with other shareholders of that firm and will therefore be counted as a single beneficial owner.
As one of the benefits of being a Regulation A+ company is lighter, less costly ongoing reporting than a fully reporting company, the SEC has carved out a further exception for companies who engage the services of a registered transfer agent and remain current with their Regulation A+ reporting obligations. A Regulation A+ company which exceeds the traditional reporting thresholds will nonetheless retain the ability to continue with the lighter reporting regimen so long as it has a “public float” (excluding the shares of affiliates) with a market value of less than $75 million or, in the absence of a public float, revenues of less than $50 million as of its most recently completed fiscal year.
A Regulation A+ company which triggers the full reporting thresholds still has a two year transitional period before it must begin to file as a fully reporting company.
Is Regulation A+ Right for You?
Regulation A+ provides a very useful avenue for companies who have a need or desire for liquidity in their shares and are far enough along in their business development so that they have the proper infrastructure to meet the ongoing responsibilities of being a public company. At the least this will entail having the full time services of a financial officer who is knowledgeable and experienced with SEC accounting rules. And the burden on a company to address investor relations will expand by reason of a larger investor base and an ongoing secondary market.
But make no mistake about it. This is not the traditional Kickstarter-type crowdfunding model. It ought not to be undertaken without consulting with experienced legal and financial professionals. Operating as a public company is a serious, long term undertaking. And if the business is managed properly, being a public company can provide greater access to capital, shareholder liquidity, brand recognition and often an increase in the company’s market valuation.