Look For Many 'Mini-IPOs' When New Reg A+ Rules Take Effect This Week

Don’t be surprised to see substantially more companies using Regulation A to sell securities through public solicitation of investors beginning June 19, when the SEC’s new “Regulation A+” rules take effect. Why? The new “Reg A+” provides a new option for “mini-IPOs,” allowing companies to raise up to $50 million from investors in unregistered public offerings. Angels benefit it two ways. This is another opportunity to invest or it can help their portfolio companies secure the funding needed to take them to the next level. 

This is a very exciting time for angel investors and entrepreneurs. To quote Donald C. Reinke, managing partner of Reed Smith LLP’s Silicon Valley office, “The securities bar is very excited about Reg A+. Many of us think it’s one of the most significant changes in securities laws regulating the public solicitation of investors for capital raising in many years… I believe Reg A+ will have a far greater impact on small companies and their angel investors than many other aspects of the JOBS Act.”

Reg A+ builds on longstanding Regulation A, which allowed unregistered public offerings of up to $5 million. The provision was rarely, if ever, used because the requirements to raise relatively few dollars, were many and expensive. Then came the JOBS Act, which increased the funding cap from $5 million to $50 million, with the idea that the regulatory requirements would be more reasonable with larger security offerings.

Much has been written about Reg A+, including speculation that it’s the new equity crowdfunding. What I’ve found, however, is that it provides another way for companies to go public through mini-IPOs or maybe to secure later stage funding (Series B or C), Reg A+ is definitely NOT unaccredited crowdfunding aimed at supporting startups.  It may be akin to crowdfunding at a higher level, if you will, but for a later stage of funding.

Why do I say this?  First, while Reg A+ does allow unaccredited investors to participate, the long list of requirements is way too onerous for most small companies to deal with. In fact, according to some sources, the SEC anticipates it will take 750 hours to prepare the related filings for Reg A+. That’s 18 fulltime person weeks.  Second, the SEC continues to keep rulemaking for crowdfunding on its calendar, and some Members of Congress also appear to be working on related legislation, meaning it is likely that separate crowdfunding rules will happen…some day.

Issuers have a choice of qualifying under Tier 1 or Tier 2 of Reg A+. Tier 1 is for security offerings of up to $20 million in a 12-month period, and Tier 2 is for offerings of securities of up to $50 million in a 12-month period. There are basic requirements for both Tiers and Tier 2 offerings include additional requirement disclosures and ongoing reporting.

It’s likely that most companies will file under Tier 2 to secure the added capital and because Tier 1 requires the issuer to register or qualify for separate state exemptions from registration in every state they plan to sell securities. A sampling of some of the requirements to file include:

  • “Form 1-A,” submission, which must be reviewed and qualified by the SEC. This form includes financial statements for two years, use of proceeds for the offering and many operational reports.
  • Tier 2 offerings need only SEC review since federal regulation preempts state regulations for that tier. A new coordinated review program between 46 states allows companies to avoid registering separately in all states they plan to sell in, which may reduce some red tape.

  • Tier 2 offerings come with some additional requirements for issuers, such as audited financial statements and ongoing disclosures.

  • Unaccredited investors can invest in either tier, although they are limited to 10 percent of net worth or annual income, which they can self-certify.

Eventually, any company filing for a mini-IPO will have to disclose the filing publicly with information becoming available on the SEC’s website. Tier 2 companies will need to make semi-annual and quarterly disclosures, available for members of the public to view, just like they would with a public company.

The opportunity to raise up to $50 million through a mini-IPO makes this is a very exciting time for startups and angel investors. Even as we learn more about how Reg A+ really works, look for significant activity in this area next month.