I run a startup, and would like to know why I would ever want to conduct a capital raise via Regulation A+ as opposed to a Regulation D exemption.
Regulation “A+” has many benefits, and will be the preferred fund-raising choice for many small businesses. Regulation A+ provides for two tiers of offerings: Tier 1, for securities offerings of up to $20 million in a 12-month period, and Tier 2, for offerings up to $50 million in a 12-month period. Both tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
Regulation A+ has three significant advantages over Regulation D offerings:
1. Shares sold in Tier 2 Regulation A+ offerings are not considered “restricted securities” under the Securities Act. This has the effect of making such shares substantially more liquid than those sold in a Regulation D offering. In a Regulation D offering, shares sold are restricted, and have to either be registered or meet another federal and state securities exemption to be sold on the secondary market. Many commentators describe securities sold in a Tier 2 Regulation A+ offering as “freely tradable.” I believe this to be a misnomer, as the Tier 2 Regulation A+ preemption from state securities registration and offering requirements only applies to the initial offering. The American Bar Association urged the Securities and Exchange Commission (SEC) to also preempt state regulation of secondary trading in Regulation A+ securities; however, the SEC chose not to explicitly do this. (Obviously, if the issuer lists the security on a national exchange, the stock will in fact be freely tradable.) Note issuers remain free to impose transfer restrictions on resales if they wish.
2. All investors, both accredited and unaccredited, are eligible to purchase securities in a Regulation A+ offering. Unaccredited investors are limited to investing the greater of 10% of their income or net worth, not including their principal residence, assuming the issuer does not list its securities on a national exchange such as NASDAQ immediately upon commencement of the offering. (If the company does list on a national exchange, there is no limit to the number of securities an investor may purchase.) In a Regulation D offering, unaccredited investors are only allowed in a Rule 506(b) offering, which imposes a limit of 35 unaccredited investors and prohibits general solicitation.
3. Issuers can advertise their Regulation A+ offerings. Issuers are allowed to use general solicitation to promote their securities offerings. This means issuers can use social media, trade shows, and industry journals to inform the public of their offering. In a Regulation D offering, general solicitation is only allowed in Rule 506(c) offerings, which require that all investors be accredited. Many investors may not want to share their details in an accredited investor verification process.
The new Regulation A+ rules (note the “A+” does not appear in the revised rules, so officially it is still just Regulation A) take effect on June 19, 2015. Many of us in the startup capital-raising space believe Regulation A+ will have more of an impact on the ability of startups to raise money than equity crowdfunding.
Please contact me today at Gary.Ross@JacksonRossLaw.com for more details regarding Regulation A+ and whether it can help your business meet its capital needs.