On March 25, 2015, in a move designed to facilitate the capital raising needs of smaller companies, the SEC updated and expanded Regulation A under Title IV of the JOBS Act of 2012. The new rules, known as Regulation A+, will allow growth companies to raise up to $50 million from unaccredited investors in a mini-IPO type offering. By doing so, investors will have more choices and smaller companies can, if desired, bypass big institutions for their capital needs by offering stock directly to their key constituents and to the general public.
Background
Under the Securities Act of 1933, a company offering or selling securities to potential investors must register the offer and sale or rely on a registration exemption. Regulation A is a longstanding exemption that allows unregistered public offerings of up to $5 million of securities in any 12-month period. No more than $1.5 million of securities can be offered by security-holders of the company.
Regulation A offerings have been relatively rare in recent years when compared to offerings that rely on other Securities Act exemptions or on a registered basis. The JOBS Act amended the Securities Act to require the SEC to update and expand the Regulation A exemption.
Regulation A+ Overview
The final Regulation A+ rules would implement Title IV of the JOBS Act and provide for two tiers of offerings. Issuers can raise up to $50,000,000 in a 12 month period for Tier II and $20,000,000 for Tier I. Another key point is that anyone can invest. This includes friends, family, employees, and others looking for investment opportunities in growth companies. While there are no investment limits under Tier 1, the higher Tier 2 level imposes some restrictions.
What Does CohnReznick Think?
Regulation A+ echoes CohnReznick’s belief that responsibly increasing access to capital for smaller companies is beneficial to the growth of the U.S. economy. Middle market companies need their representatives and regulators in Washington to further develop responsible and intelligent solutions to build on the momentum of the JOBS Act. Working together, we will continue to find solutions that maintain the balance between accessing the capital that so many growing businesses need and protecting investors.
Highlights
Key components of Regulation A+ include the following:
1. While there is no limit for accredited investors, individual non- accredited investors can invest a maximum of the greater of 10% of their net worth or 10% of their net income in a Regulation A+ offering (per offering).
2. Investors can self-certify their income or net worth for purposes of the investment limits, eliminating the need for extensive documentation.
3. Issuers can discuss and advertise their offering using virtually any medium including social media.
4. The securities issued are unrestricted and transferable although some issuers may elect to impose contractual transfer restrictions.
5. The issuer will need to file a disclosure document and audited financials with the SEC which must be approved prior to any sales. The Offering Circular will receive the same level of scrutiny as a Form S-1 in an IPO, which may be a drawback.
6. Under Tier II, an issuer will be required to provide two years of audited financial statements with the Offering Circular. Tier I offerings require only reviewed (not audited) financials.
7. An issuer can gauge initial interest in the offering before spending time and money creating the Offering Circular. A “Preview” mode on SeedInvest will allow investors to express interest, but not yet invest.
8. While there are no ongoing disclosure requirements for Tier I, Issuers must publish an annual disclosure filing, a semi-annual report, and current reports under Tier II. Each of these are simplified versions of Form 10-K, Form 10-Q and Form 8-K. The reports will require ongoing audited financials and these disclosures can end after the first year if the shareholder count is less than 300.
9. Regulation A+ Tier 2 preempts state law – a major change from Regulation A which required registering securities in every state in which an offering or sale is made. Tier 1 does not currently have state pre-emption.
10. Section12(g) shareholder limits (2,000 person and 500 non-accredited investors) will not apply under certain circumstances.
Title IV, Regulation A+ will become effective 60 days after publication in the Federal Register.
Contact
For more information, please contact Alex Castelli, a CohnReznick Partner and leader of the Firm’s Public Companies Group and Technology Industry Practice, at [email protected] or 703-744-6708.
