In March of this year, the House of Representatives passed H.R. 4263, better known as the Regulation A+ Improvement Act. The bill passed with bipartisan support, being co-sponsored by two Democrats: Representatives Sinema and Gottheimer, alongside two Republicans: Representatives Stivers and Hollingsworth.
Signing this bill into law will be a much needed boon to startups, small businesses, and even medium-sized private companies. I realize it’s pretty difficult to remove political affiliation from anything in Washington right now, but as someone who helped author the JOBS Act of 2012 (under President Obama) and as someone who is building a company that benefits from Regulation A+, I want to strip all of that away and explain why this bill is important.
For some context, the JOBS Act of 2012 improved Regulation A by allowing companies to offer up to $50 million of securities during a 12-month period under two different tiers of “Regulation A+” offerings.
Tier 1 allows companies to sell up to $20 million of securities. Also known as a “mini-IPO,” the issuer still must qualify with the SEC and the individual states in which the issuer seeks to offer securities; however, the ongoing disclosure obligations have been reduced, and many states have introduced a streamlined review process to ensure timely qualification.
Tier 2 of Regulation A+ requires heightened disclosures and reporting, but allows the sale of $50 million of securities and preempts state qualification. H.R. 4263 increases the Reg A+ cap from $50 million to $75 million. So, why does this matter?
Investors are being short changed
First and foremost, companies need this capital.
According to Audit Analytics, there are currently 290 companies that have taken advantage of Reg A+, meaning these companies have or are close maxing out the capital they can access from the policies created by the JOBS Act.
Those that have maxed out are left with few options: consider an IPO, which requires an enormous amount of financial paperwork, legal and accounting fees not to mention the stress and volatility that comes with being public; find capital from another source which is not easy to do in large sums without giving up equity; or slow plans to scale, which hurts future job growth.
Raising the cap to $75 million, however, will allow companies to access additional funds which they can then invest into their business in a much more cost effective fashion than a fully registered public offering of securities.
Companies will still be required to disclose significant financial records, but on a more manageable scale than what the public company provisions require and without giving away the company to VCs or PE firms.
More medium-sized companies will consider the $75 million cap as a viable option
The beauty of Reg A+ has always been it its flexibility.
It was designed in this way to enable a new crop of businesses, ideas and jobs, and it has seen modest success since becoming legislation. Since Reg A+ rules took effect in 2015, U.S. Securities and Exchange and Commission data show that more companies are using the exemption than before the JOBS Act.
Currently, the $20 million cap for Tier 1 and $50 million cap for Tier 2 works well for startups and small businesses with a few medium sized businesses taking advantage of the legislation. If the cap grows to $75 million, I expect to see more medium-sized, private companies access this source of capital.
Why? For starters, medium sized companies may feel stuck with the current capital limitations of Tier 2 because they can credibly raise more money.
For example, a medium sized online store should have revenues north of $40 million. If we use comparable revenue multiples, that store should have an EV of close to $200 million. The business may want to, and can, credibly raise more than $50 million. But even with fewer disclosures, it’s still costly and time-consuming to take advantage of these exemptions, so raising the cap to $75 million means more of these companies will be willing to take the jump, knowing there is the potential for a higher outcome that makes it worth their while.
The increase of the cap will also provide a counter to inflation. The absence of inflation-control has been one of the critiques of the 2012 Act, which makes sense as $50 million today just doesn’t go as far as $50 million did in 2012. The current bill also allows for future adjustments for inflation to solve this potentially recurring issue.
A call to action
Now that the bill has passed the House, it’s up to the Senate’s Committee on Banking, Housing, and Urban Affairs to bring the bill to the floor of the Senate for a vote.
One positive sign that this could happen is that the bill is basically clean in its current form. By the way, this also points to how important the House believed the bill to be since it’s not an easy feat to get a bill to pass through committee and on to a vote without unrelated amendments tacked on.
Of course, the Senate has a pretty busy legislative agenda at the moment, not to mention a plethora of votes on presidential appointments.
So, the best thing that can happen for this bill right now is for all of us who understand its value to contact members of the Senate’s Committee on Banking, Housing, and Urban Affairs to express our support.
Nick Bhargava is a co-founder of GROUNDFLOOR. He leads product development and is responsible for regulatory strategy. An expert in securities law, Nick was heavily involved in the JOBS Act as an early pioneer who advanced the concept of crowdfunding. His years in finance have included work for the Financial Services Roundtable, SEC, FINRA, TD Waterhouse and RBC Financial Group. Nick received his LLM at Duke University School of Law and holds a BS in Biological Sciences and Business from the University of Alberta.