Regulation A+: little hype, early promise?
While equity crowdfunding has received widespread attention since the 2012 JOBS Act, another SEC rule change (named Regulation A+) that allowed companies to offer “mini-IPOs” has flown largely under the radar. However, it has shown early promise as a new method for startup financing since it was passed in 2015. In this feature, SSTI addresses three important questions related to Regulation A+ (Reg A+) including:
- What is Reg A+?
- What are the benefits and drawbacks of the offering?
- What impact has it made so far?
What is Reg A+?
At its core, Reg A+ allows U.S.-based companies to gauge their offerings’ appeal in the marketplace and raise up to $50 million over a 12-month period in growth capital from both accredited and non-accredited investors with significantly less regulatory red tape than the traditional initial public offering (IPO) allows. Sometimes called a mini-IPO, due to the relaxed regulatory burden, with Reg A+, a company can ‘test the water’ prior to filing with the SEC. During the testing period, the startup 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,” according to Crowdfundinsider.com. However, they cannot accept investments until after the SEC has approved the issuer’s offering. There are two tiers of Reg A+:
- Tier I – an issuer may raise up to $20 million in a 12-month period with unaudited financial statements and no on-going obligation to file with the SEC other than an exit report within 30 days of completing the offering; and,
- Tier II – the issuer is allowed to raise over $20 million and up to $50 million within a 12-month period. However, Tier II offerings are subject to a restriction on the amount of investment that can be made by a non-accredited person.
What are the benefits and drawbacks of the offering
For many companies, especially those looking for growth capital, a Reg A+ offering has many benefits compared to the traditional IPO or equity crowdfunding. These benefits include a larger amount of capital that can be raised; freedom to use any communication method; and, limited restrictions on shares.
In comparison to equity crowdfunding, Reg A+ offers can raise significantly more capital. While startups can only raise a few $1 million via an equity crowdfunding offering, Reg A+ issuers can raise up to $20 million for a Tier I offering and $50 million via a Tier II offering. Under Reg A+, companies are free to use any method of communication (e.g., video clips, presentations, and articles) to promote the offering – there are more strict rules for equity crowdfunding offerings.
Unlike both equity crowdfunding and traditional IPOs, the solicitation is not binding until the offering is filed and approved. This allows the company to back out of the offering without any SEC rules violations while providing the company with a clear picture of the market demand for their product. Under Reg A+ offerings, the shares sold are not restricted and not subject to a holding period before they may be resold – equity crowdfunding offerings have more strict rules.
In comparison to the traditional IPO, companies find two primary benefits. First, there is no SEC-required ‘dead period’ while the offering is underway like a traditional IPO. Thus, the company can promote their activities to potential investors without worry that the offering will be shut down due to those activities. The Reg A+ also does not require a minimum capital raised.
While there are benefits, Reg A+ also presents drawbacks that may not make it a perfect fit for all companies, specifically the potential cost of the Reg A+ offering. This is especially true when compared to an equity crowdfunding offering. An individual Reg A+ offering could cost up to $100,000 to prepare for filing the proper paperwork with the SEC.
After filing, the costs can reach $500,000 or more, including the cost of required annual on-going reporting requirements for Tier II offerings. Due to the costs of filing and reporting, the Reg A+ offering is considered to be a better fit for more mature startups or growth-stage companies.
What impact has it made so far?
Between June 2015 and October 2016, there have been 81 SEC-approved Reg A+ offerings seeking nearly $1.5 billion in funding according to Regulation A+: What Do We Know So Far. Released by the SEC, the report highlights several key findings from the first 16 months of Reg A+ including:
- The average issuer was seeking up to approximately $18 million – Tier I average size of $9.5 million and Tier II was $28.9 million;
- Tier II offerings were more common among qualified offerings, accounting for 60% of qualified offerings;
- Companies mainly offered equity, which accounted for over 85% of all offerings;
- The legal fees averaged around $107,000 per filing; and,
- The median time from initial public filing to qualification was 78 days.
The SEC author concludes that, while there have been a wide range of issuers that have initiated Reg A+ offering, “crucial questions remain regarding offering outcomes and future trends in intermediary involvement and secondary market liquidity as the Regulation A+ market continues to develop.”
However, the author also highlights that “early signs indicate that Regulation A+ may offer a potentially viable public offering on-ramp for smaller issuers — an alternative to a traditional registered IPO — and either an alternative or a complement to other securities offering methods that are exempt from Securities Act registration.”