Angel Insights Blog

By: Marianne Hudson, ACA Executive Director

The SEC unanimously approved a new rule, dubbed “Reg A+,” on March 25^th.  The rule allows companies to raise up to $50 million from the general public in unregistered public offerings, building on a part of the JOBS Act passed by Congress in 2012.  Issuers may begin using this rule in about 60 days.

Many ACA members have asked what Reg A+ means for angels and the early stage investing community, especially given some blogs and media stories with a wide variety of interpretations.  This post provides basics about the new rule, and ACA is following up with two activities:  a special breakfast briefing at the ACA Summit on the new rules, led by law firm Reed Smith and ACA’s policy advisory council of attorneys is preparing a deeper information piece for ACA members.

Reg A+ Basics

The SEC describes the new rules this way:  “The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. The final rules … provide for two tiers of offerings:   Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.”

The “certain basic requirements” and “additional disclosure and ongoing reporting requirements” are details that small businesses and investors alike will need to become familiar with and will likely help them determine which SEC rules should be used for which offerings.  Here are a few of the requirements of note:

• Issuers for both Tiers will need to file a “Form 1-A,” 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 1 offerings will also need to be approved by regulators in each state securities are sold, while Tier 2 offerings need only SEC review since federal regulation preempts state regulations for that tier.  There is a new program of coordinated review between 46 states, which SEC Chair Mary Jo White said was a very positive development, but added that “it is a new program and at this stage concerns remain about the costs association with state securities law registration and qualification requirements.”
• 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.

Some describe Reg A+ as a “mini-IPO” with “mini-registration.”  Others have written that Reg A+ is the new “equity crowdfunding.”  As ACA builds its understanding of the new rules, we’ll provide additional resources and perhaps answer if Reg A+ will have the biggest impact at the Series B or C level or if it might be commonly used for startup equity crowdfunding and angel-stage deals.  Much of the legal input I’ve seen to date predicts the most impact at later stages, which could be a good thing for angel-backed companies that need follow-on capital.

This updated rule builds on longstanding Regulation A, which allowed unregistered public offerings of up to $5 million but was used rarely.  The JOBS Act increased the limit from $5 to $50 million with the idea that the regulatory requirements would be more reasonable with larger security offerings.

Resources

There is a growing set of writings on new Reg A+.  Here are some resources and articles for background:

SEC Rules, State Securities Information and Law Firm Analysis

• SEC press release
• Official SEC Rules
• Morrison & Foerster Client Alert, Regulation A+: Final Rules Offer Important Capital Raising Alternatives
• North American Securities Administrators Association Coordinated Review Program For Regulation A Offerings

Articles with Varying Interpretations of Reg A+ Impact

• SEC: Startups Can Now Raise $50 Million in ‘Mini IPO’ (Kendall Almerico, in Entrepreneur.com)
• SEC Finalizes Reg A Plus; State Law Preempted in Larger Tier of Offerings (Rob Tricchinelli, in Bloomberg Law Securities Law Daily)
• Drizzling on the Reg A+ Parade (William Carleton, in Medium.com)
• The Reg A+ Bombshell: $50M Unaccredited Equity Crowdfunding Title IV Takes Center Stage (Kiran Lingam, in Crowdfund Insider)
• Did the SEC Just Kill Early Stage Venture Capital?  (Nish Acharya, in Forbes.com)

We look forward to building the story and information at the ACA Summit and through the work of ACA’s public policy council.