Last week, the United States Securities and Exchange Commission (SEC) unveiled new rules that will make it possible for private companies to accept investments from everyday investors.
It’s not the CROWDFUND Act that everybody has been talking about for years and which may never be put into place, but it does pave the way for businesses to raise up to $50 million in offerings that aren’t open only to wealthy investors.
The new Regulation A+ rules give companies the ability to sell equity in two tiers. Under a Tier 1 offering, companies can offer up to $20m in equity to the public over a 12 month period.
Companies will need to have their financials reviewed and an offering circular approved by the SEC. Under a Tier 2 offering, companies will be able to offer up to $50m in equity to the public over a 12 month period.
In addition to the Tier 1 requirements, audited financials must be provided, and ongoing disclosures similar in nature to those publicly-traded companies are required.
The buzz around Regulation A+ is due to the fact that under both Tier 1 and Tier 2 offerings, companies can sell equity to non-accredited investors (individuals who don’t have more than $200,000 a year in income or a net worth of at least $1m).
In Tier 2 offerings, non-accredited investors will be limited to investing 10% of their net worth or net income, whichever is greater, in an effort to prevent individuals from betting more than the SEC believes they can afford to lose.
Importantly, non-accredited investors will be able to self-report their net worths and incomes, so companies will not have the burden of verifying this information.
Combined with the fact that companies using Regulation A+ can freely advertise their offerings to the public, Regulation A+ is being hailed by many as a groundbreaking development that will usher in a new wave of equity crowdfunding in the United States. But will it really?
A Regulation A+ offering isn’t going to be cheap to prepare and according to some observers, the total cost could run companies upwards of $100,000.
Additionally, the offering circular that the SEC must approve is expected to receive the same level of scrutiny as an SEC Form S-1, the document companies must prepare for a traditional IPO.
Fortunately, Regulation A+ does allow companies to test the waters before they prepare their circulars, so in theory some of the costs could be delayed until companies have confidence their offerings will be successful.
Despite this, given the minimum costs, disclosures required and reviews that companies will be subjected to, it might be appropriate to think of Regulation A+ offerings as mini IPOs rather than the true crowdfunding campaigns proponents have been seeking.
Certainly, there are reasons to believe there won’t be a flood of new companies raising money using Regulation A+, but that doesn’t mean that the SEC’s new rules aren’t a step in the right direction.
Giving young companies more ways to raise capital is almost certainly a good thing and it would be surprising if, at a minimum, Regulation A+ doesn’t result in at least a few interesting, innovating businesses getting capital they might otherwise not have.