The JOBS Act, which was signed into law in April 2012, led to the adoption of three exemptions from the registration requirements of securities offerings in the U.S. All three allow raising capital via crowdfunding. The first to go effective (September 2013) was Reg D Rule 506(c) of the Securities Act of 1933, which allows unlimited general advertising of securities offerings, but restricts the issuer to accept funds only from “Accredited Investors.”
The next one to become effective (June 2015) was Regulation A+ (“Reg A+”), which is not a new exemption, but rather an extensive revision of an existing one which was rarely used by issuers.
The last of the three exemptions to go into effect (May 2016) was Regulation Crowdfunding (“Reg CF”).
This article will focus on Reg A+ and Reg CF which, unlike Rule 506(c), permit to raise capital from the general public.
Reg A+ vs. Reg CF – Framework:
Regulation A+, which is an improved version of the old hardly-used Regulation A, created two tiers: Tier 1, which allows investments up to $20M and benefits from lenient compliance framework on the federal level, but is still subject to state review and; Tier 2, which allows investments up to $50 million, is subject to a more rigid compliance regime on the federal level comparing to Tier 1, but benefits from preemption of state securities laws.
Reg CF, in contrast, allows issuers to raise only up to $1 million per year but, as in Tier 2 of Reg A+, provides preemption from state review of the offering materials.
Reg A+ vs. Reg CF – Offering Documents:
Issuers relying on the exemption provided by Reg A+ (Tiers 1 & 2) must file Form 1-A with the SEC, which is a rather extensive disclosure document mandated for offerings of securities in reliance on Reg A+. This document includes business, legal and financial information about the company and is subject to review and comments by the SEC. Form 1-A will be declared qualified by the SEC as soon as all comments have been cleared by the issuer. Once qualified, sales of securities under Reg A+ may commence.
Reg CF, on the other hand, requires a filing of a much shorter disclosure document with the SEC called Form C. This document is filed for notification purposes only and is not subject to review and comments by the SEC. Sales of securities under Reg CF may commence 21 days after the filing of Form C with the SEC.
Since the disclosure document required by Reg CF is much shorter and not subject to review and comments by the SEC, the “time to market” of the offering under Reg CF is much faster than it is under Reg A+.
Reg A+ vs. Reg CF – Ongoing Reporting Requirements:
Tier 2 of Reg A+ is subject to some significant ongoing reporting requirements. Unlike Tier 2, Tier 1 is not subject to any ongoing reporting requirements. Reg CF requires only a short version of an annual report to be filed once a year after the offering closes. So while the ongoing reporting requirements under Reg CF are much less extensive compared to Tier 2 of Reg A+, issuers offering securities under Tier 1 of Reg A+ are completely free from ongoing reporting requirements.
Reg A+ vs. Reg CF – Manner of Offering Advertisement:
Under Reg A+ (Tiers 1 & 2) issuers are free to use essentially any media channel to promote the offering. Reg A+ also enables companies to “test the waters” even before an initial filing of Form 1-A with the SEC is made. “Testing the waters” is a term referring to the right of an issuer to solicit indications from the investing community in order to gauge the scope of interest in a possible securities offering. These indications are not binding but are extremely valuable in figuring out the magnitude of investors’ appetite for the securities of the issuer considering an offering.
Reg CF, however, is subject to a much stricter regime in connection with the advertisement of the offering. Issuers relying on Reg CF may only publish the full materials related to the offering on just one SEC-approved Funding Portal and are limited to a “tombstone” type ads in other media channels referring interested investors to the Funding Portal for more information on the offering.
Reg A+ vs. Reg CF – Status of Shares Sold:
Shares sold pursuant to Reg A+ are not restricted and not subject to a holding period before they may be resold. However, in order for an investor in a Reg A+ offering to be able to resell the shares, the issuer should obtain a trading symbol from FINRA (Financial Industry Regulatory Authority), which would enable it to have its shares quoted by a market maker on the OTC market.
Shares issued pursuant to Reg CF are restricted for a period of one year so they may become publicly-traded only a year after the offering closes and only should the issuer conducting a Reg CF securities offering either become an SEC reporting company or start reporting under the alternative reporting standard of the OTC Market.
Reg A+ vs. Reg CF – Applicability to Startups:
Reg A+ may be found specifically attractive by startups having a large pool of end-users or followers or those looking to establish one (startups developing apps for instance). A startup having many users/followers, which would choose to offer securities based on Reg A+ has the potential to tighten the connection with those users/followers, who may now become shareholders in the company, hence enhancing their engagement with it and its brand and even turning them into “ambassadors” with a clear interest to promote awareness about the company and its products/services once they become stakeholders who will benefit financially from the company’s success. Since the costs associated with a Reg A+ offering are significantly higher than those associated with Reg CF, generally Reg A+ will better fit more mature startups, while Reg CF will generally be more applicable to early stage startups looking for seed capital.
Reg A+ vs. Reg CF – Beneficial Collateral Effect of the Offering Campaign:
As advertisement of an offering pursuant to Reg A+ is essentially unlimited and affords the use of a broad spectrum of communication channels and marketing materials (such as video clips, presentations, articles and more) both startups that already have a large pool of users/followers and even those that are not there yet but looking to establish one may benefit from a potential collateral effect that cannot be underestimated, which is an elevated awareness in the market for the company’s products/services that could attract not only investors but also more users, followers and customers.
Offerings under Reg CF may also benefit from an enhanced exposure of products/services through the crowdfunding campaign, but in a more limited fashion due to the restrictions imposed on Reg CF with respect to the manner by which the offering materials may be presented and the channels through which they may be promoted.
Both Reg A+ and Reg CF are applicable to startup companies. While Reg CF would generally be more appealing to startups at the very early stages looking for a pre-seed or seed investment, Reg A+ will likely be found more attractive by mature startups around the time they are looking for a round A investment or even later. Unlike Reg CF which is limited to promoting the offering through only one Funding Portal, Reg A+ permits the utilization of a broad spectrum of media channels to advance the offering. The regulatory-related costs involved with Reg A+, however, are significantly higher than those associated with Reg CF. Moreover, since the disclosure document required by Reg A+ is much more extensive than the one used under Reg CF, and because it is subject to review and comments by the SEC, “time to market” of an offering based on Reg A+ is significantly longer than an offering conducted under Reg CF.
Unlike Reg CF which is limited to promoting the offering through only one Funding Portal, Reg A+ permits the utilization of a broad spectrum of media channels to advance the offering. The regulatory-related costs involved with Reg A+, however, are significantly higher than those associated with Reg CF.
Moreover, since the disclosure document required by Reg A+ is much more extensive than the one used under Reg CF, and because it is subject to review and comments by the SEC, “time to market” of an offering based on Reg A+ is significantly longer than an offering conducted under Reg CF.
Lior Ostashinsky, Esq. is a member of the Bar in both New York and Israel. Ostashinsky Lior Law Office is focused on providing a wide range of legal services concerning corporate and securities law in Israel and the U.S. In the past, Ostashinsky was the founder and the managing director of Tailor-Made Capital, an investment company owned by Meitav Investment House, one of the leading investment houses in Israel. Tailor-Made Capital provided financing to micro-cap U.S. publicly traded companies. Ostashinsky also ran a column about the U.S. capital market for the lucrative financial newspaper “Globes.” His vast experience in the financial world, which includes finding and managing financing deals, investments, and fundraising in the U.S. and the Israeli capital markets and his profound understanding of these fields, allow him, beyond the traditional legal counseling, to assist and guide the office’s clients in the business as well as the technical aspects of financing deals. Ostashinsky holds Israeli degrees in Business Administration (B.A.) and Law (LL.B.), a Master of Laws (LL.M.) from Duke University, U.S.A.