There are three securities exemptions created by the JOBS Act of 2012 that enable firms to raise money online. Reg CF [Regulation Crowdfunding], Reg D 506c (accredited only), and Reg A+ [Regulation A].
If a company uses Reg A+, they may raise up to $75 million online by soliciting both Accredited and non-Accredited Investors. At the same time, an issuer may decide to allow trading in the security after the funding round is completed. Reg A+ requires the company to submit offering documents to the Securities and Exchange Commission (SEC), which must be qualified by the SEC before the company commences a security offering.
Reg A+ has slowly grown in popularity due to the ability to raise a significant amount of money and potential liquidity for issuers. Also, the fact that you may solicit anyone to participate in the security offering has increased interest from companies in need of growth capital. While there are benefits to using Reg A+ there are also challenges that an issuer must recognize prior to pursuing a securities sale under the rules.
CI recently connected with a company that has recently utilized Reg A+ to raise money online. While the offering was successful, they shared their opinion on several items they wished they had been more aware of prior to raising the exemption to raise funding.
According to this company’s experience, they advise that you have a Chief Financial Officer (CFO) at the firm and perhaps internal counsel before launching a Reg A+. The time commitment to compliance and the need to provide financial statements should not be ignored.
While the cost to launch a Reg A+ varies, you can expect to pay tens of thousands of dollars, up to $100,000, to get the offering up and running. However, expenses continue after an offering has been completed, and in this firm’s experience, that cost is between $50,000 and $150,000+ annually. A financial audit is required to be completed annually, and this company said it is paying tens of thousands of dollars to comply.
Another challenge the company did not anticipate is the difficulty in finding experienced vendors (lawyers, accountants, etc.), as many claim they know what they are doing, but these claims may not live up to reality. CI has heard this complaint before. This company went so far as to wish there was a preferred vendors list they could have referenced.
“There has been so much pain and agony at dealing with accounting firms that have caused months and months of delay. This is very, very detrimental to your business.”
This specific issuer found themselves in a bit of a bind as they wanted to commence a second funding round under Reg A+, one year after they were qualified, and discovered the SEC required new audited financials prior to commencing the funding round so they had to push pause and delay the offering. In their experience, their advisors were not aware of this requirement. As the offering had to be qualified once again, the company was delayed by almost half a year. The company also cautioned that different examiners can lead to drastically different experiences, and slow qualification standards mean an offering may take months to complete.
So, what would this company like to see changed in the Reg A+ securities exemption?
First, they believe that an annual audit requirement should be removed and replaced with reviewed financials. In their opinion, investors will receive the information they need while the company is saving tens of thousands of dollars.
Currently, ongoing reporting requirements are too burdensome in their experience. This company believes that providing investors with financial performance and a company update makes more sense. So many of the compliance documents are never read by anyone (except the SEC and lawyers) they do not make a lot of sense. This company believes the documents should focus more on investor needs.
“At the end of the day, we have to realize who these documents are for. They are supposed to be for the investor and not the legal community. They need to be simple and short and in terms that are easily understandable. In legalese nobody reads this. In making all of this shorter and more concise I think we will get more founders willing to participate and provide the ongoing disclosure.”
This company also believes there should be a path for firms to shift from Reg A+ issuer compliance to Reg CF compliance, thus lowering costs while being compliant. Right now, once you are a Reg A+ issuer, you must provide ongoing reports as required by the exemption every year.
As for recommendations for companies considering an online securities offering, the company says if you are raising under $5 million, you should focus on a Reg CF offering. This exemption requires a Notice Filing—not a document that must be qualified by the SEC.
At the same time, they wish Reg CF was increased to $20 million which would create a more effective step-ladder to accessing capital. Smaller companies could benefit from lighter disclosure demand under Reg CF up to $20 million and then transition to a Reg A+ offering.
Also, do not forget the potential of a Reg D securities offering. All you must do is file a two-page document (notice filing) with the SEC while presenting a private placement memorandum (PPM) to accredited investors.
While this is an anecdotal experience of a single issuer, it provides insight into challenges a company may encounter under the exemption. The takeaways are to work with experienced vendors, and you may want to partner with a platform or tech provider that can guide you in the right direction.
Reg A+ can be an effective path to fund your company, but be aware of the level of effort and the costs in advance. At the same time, there is room for policymakers to improve the exemption to streamline requirements while maintaining sufficient investor protection parameters. In the end, the exemption needs to work for both investors and issuers and improvements should be made by regulators and elected officials.