This spring, the SEC adopted final rules required by the JOBS Act, which some hoped would increase smaller companies’ access to capital. Note, this wasn’t the long-awaited crowdfunding rules, it was the expansion of Regulation A (called by many Reg A+).
Regulation A is an existing, and little used, exemption from the registration requirements of the Securities and Exchange Act of 1933. The old Regulation A allowed companies to raise up to $5 million by selling securities to the public (not just accredited investors) in offerings that were not full-blown public offerings.
The revisions to Regulation A split offerings into two tiers and increased the limit to $50 million. Tier 1 allows offerings of securities of up to $20 million in a 12-month period, and Tier 2 allows offerings of securities of up to $50 million in a 12-month period. Both Tiers are subject to certain basic requirements (including regarding investor suitability, resale limitations, and public filings) while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.
All offerings under new Regulation A will continue to require an extensive offering statement on Form 1-A, which is subject to SEC staff review and comment. The offering statement is publicly filed and available for review. Two years of financial statements are required, and for Tier 2 offerings, the financial statements are required to be audited. Tier 2 offerings also require annual and semiannual reports with the SEC (similar to 10-K and 8-K filings). One new benefit is that for Tier 2 offerings the new rules don’t require compliance with Blue Sky laws in each state in which the securities are sold.
While this easing of the rules, especially in Tier 1 may help certain companies raise money publicly, this is not necessarily a useful tool for startups and other emerging companies. Drafting the offering circular will most likely be costly and requires full SEC review and comment. Also, even in Tier 1, the public financial statements and offering statement mean that the company will be public, for better or for worse.
For me, traditional Regulation D offerings (even though limited to accredited investors and even though general solicitations are not allowed) are still probably the best option for startup companies. Timing from term sheet to closing will most likely be quicker and no public filings (except the limited Form D) are required. Blue Sky filings may be required, but exemptions are often available when the regulation D rules are followed. Even general solicitations under Regulation D, which require enhanced verification of accredited investors, will most likely be a quicker and more cost effective means of raising capital for emerging companies.
Like many of you, we are looking forward to the SEC’s release of the crowdfunding rules and determining what impact they’ll have on raising capital for startups and other emerging companies.
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