You don’t have to be wealthy or well-connected to invest in growth-stage companies.
By David M. Freedman and Matthew R. Nutting
The Jumpstart Our Business Startups (JOBS) Act of 2012 introduced several new ways for private companies to raise capital. Title II of the JOBS Act made general solicitation legal in certain Regulation D offerings for accredited investors. Title III established equity crowdfunding and opened the door for non-accredited (average) investors.
In 2015, the SEC issued final rules under Title IV, colloquially known as Regulation A+. Title IV expanded the moribund Regulation A exemption from a $5 million raise limit to a $50 million raise limit. Reg A+ also preempts blue sky review (i.e., no need for approval by every state in which the offering is made) for offerings over $20 million. Blue sky review is still required for offerings under $20 million.
Footnotes:
1. Rule 506(c) allows general solicitation under Title II of the JOBS Act. Both tiers of Reg A+ allow general solicitation.
2. Congress may increase this limit to as much as $5 million, maybe as soon as 2021.
3. Title III offerings may appear on non-broker-dealer funding portals that are registered with the SEC or on broker-dealer platforms.
Some Regulation A+ offerings are listed through online offering platforms. Such platforms may be dedicated to Reg A+ offerings, or they may feature (as does Wefunder, for example) a mix of Regulation D, Title III, and Regulation A+ offerings. But Reg A+ offerings are not required to go through online intermediaries. Moreover, these new offerings are allowed to “test the waters,” measuring potential interest by investors, before undertaking the obligations of an offering.
Even when a Reg A+ offering gets listed on an online platform, the issuer has no obligation to conduct any sort of Q&A forum or chat with potential investors, as is customary on Reg D offering platforms and equity crowdfunding portals.
Limits for non-accredited investors
Before the JOBS Act, Regulation A issuers could sell unrestricted securities to non-accredited as well as accredited investors. The expanded Reg A+ still lets non-accredited investors participate, but it limits their annual investment in offerings above the $20 million threshold to 10 percent of their income or net worth, whichever is greater. All investors can invest an unlimited amount in offerings up to $20 million.
By contrast, the offering platforms that list Reg D offerings, under Rules 506(b) and 506(c), are open only to accredited investors.
Not ideal for startups
There has been much confusion in the media about Reg A+, as some reporters have referred to it as “an opportunity for non-accredited investors to buy equity in startups,” whereas Title IV was originally structured mainly for growth- and later-stage companies that are not quite ready to file IPOs. New York securities lawyer Brian Korn calls Reg A+ the “minor leagues for IPOs,” and others refer to it as the “mini-IPO,” as issuers are required to go through a “scaled-down registration” process and file a prospectus-like document called an “offering circular” with the SEC.
The benefits of Reg A+ for seed-stage and startup companies seem limited mainly because offerings up to $20 million still require blue sky review and compliance, which can be very costly and time-consuming. Time will tell whether seed-stage and startup companies try to take advantage of Reg A+ rather than (or in addition to) Reg D, intrastate exemptions, or Title III equity crowdfunding.
Looking ahead, we hope that Reg A+ will work alongside rather than overlap with Title III equity crowdfunding and Reg D offerings, to provide a seamless progression of capital-raising options for companies: from early seed-stage startups using Title III, on to early growth-stage companies fueling expansion with Reg D, and then to Reg. A+ for pre-IPO later growth.
About the authors David M. Freedman, based in Chicago, has worked as a financial and legal journalist since 1978. Matthew R. Nutting practices corporate law with the firm Coleman & Horowitt in Fresno, CA. Freedman and Nutting are coauthors of Equity Crowdfunding for Investors (Wiley & Sons, 2015).