By: Jeffrey B. Stein, J.D.
Access to capital for small businesses and entrepreneurs has always been a challenge, and the lack of such access has undoubtedly kept many great ideas that would improve our lives from ever coming to market.
Raising capital by selling shares to the public has always been available to established companies via an initial public offering (IPO). However, startups and small businesses, even profitable ones, generally are precluded from raising capital this way for several reasons. Cost is a primary reason, and interest by a capable investment banker-underwriter is also a requirement.
In an attempt to address this issue, the United States Securities and Exchange Commission, on June 19, 2015, adopted an amendment to existing Regulation A. This private placement exemption is being referred to as Regulation A+. Using this exemption, companies are now permitted to raise up to $50 million in capital in a 12-month period from both accredited and in some circumstances non-accredited investors. As there is a required SEC review process, the offering is in effect, a mini-IPO!
For some entrepreneurs this is a dream come true, giving small businesses and startups the same opportunity to sell their shares to the public just as the big boys do. This method provides a solution for quickly raising significant capital from the public and without the expense, complexity and detailed disclosure requirements of a traditional IPO. Regulation A+ offerings can be completed for a small fraction of the cost of a traditional IPO or a Regulation A offering!
Regulation A, was limited by state “blue sky” requirements meaning that it was necessary that the offering had to be approved in each state in which shares were to be sold to the public. To offer shares in all 50 states was an enormous undertaking that few took advantage of. Now with the new Regulation A+ exemption, the state-by-state approval is not always necessary.
Under Regulation A+, the SEC has established two tiers of fundraising with varying requirements for qualification and disclosure to the public. Each tier permits general solicitation and the use of websites and social media for potential investor communications thereby providing access to a younger audience and an economically diverse range of offerees in the new age of investing through crowdfunding. Potentially, the offering can even be advertised on public media such as radio and television!
Under Tier I, an issuer may raise up to $20 million in a 12-month period with unaudited financial statements and no ongoing obligation to file with the SEC other than an exit report within 30 days of completing the offering. However, if an issuer uses Tier I, the issuer must make state blue-sky filings in each state where it seeks to raise capital. This is a time-consuming, complicated and expensive process. Yet some areas of the country have grouped together states wherein a filing for Tier 1 can be coordinated so that a filing that is approved in one state of the group is approved in the remaining states of that group.
For example, the Western Region, includes Alaska, Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. Therefore a Regulation A+ Tier 1 filing that requires review of the offering by each state in which the offering is to be sold only needs to be approved by one of the states and can be offered in all of them. Note that California, unfortunately, is not a participant in the Western Region.
A Tier 2 offering permits the issuer to raise over $20 million and up to $50 million within a 12-month period and does not require the state-by-state approval. However, Tier II require the issuer to file audited financial statements for the prior two years and to file annual, semiannual and current event reports with the SEC.
One of the most significant benefits offered with a Regulation A+ offering is that the SEC permits the issuer to “test the waters” before submitting its offering circular to the SEC. This means the issuer can solicit interest from the public to determine if there is sufficient investor interest before it expends the time and money to prepare and file an offering statement with the SEC. However, the issuer is not permitted to accept any funds from any investor until after the SEC qualifies the offering. If an issuer receives positive indications of interest from potential investors, the issuer may then elect to file an Offering Statement with the SEC to obtain SEC qualification. Once the SEC qualifies the offering, the issuer can accept funds.
As many entrepreneurs can attest, crowd funding has been instrumental in getting useful products to market, and new businesses started that prior to the advent of crowdfunding might never come to fruition. Now, crowdfunding can be taken to the next level by the utilization of Regulation A+. Crowdfunding on steroids is here!
Copyright © 2016 Jeffrey B. Stein For publication: San Diego Business Journal, Orange County Business Journal, Los Angeles Business Journal
