In June 2015, final rules adopted by the Securities and Exchange Commission (“SEC”) went into effect, which implemented Title IV of the Jumpstart Our Business Startups (“JOBS”) Act. Among the changes brought about by the JOBS Act and the SEC rules was the amendment of the long-standing securities registration exemption known as Regulation A. The amendment of Regulation A created a new securities registration exemption known as Regulation A+, which created a new, albeit complicated, way to reach a broader range of potential investors. Under previous securities registration exemptions, primarily accredited investors (generally meaning individuals who make over $200,000 in income or who have $1 million in assets) have been able to invest in startups and other growing businesses attempting to raise capital. Regulation A+ broadens the ability of businesses to raise capital from non-accredited investors.
Taking a step back for a moment, generally speaking, when ownership interests in a company are offered or sold to investors, the Securities Act of 1933 and the state securities, or “blue sky”, laws require that the offer and sale of ownership interests be registered with the SEC and the applicable state agencies before offers and sales can be made, unless a securities registration exemption is available. Because many business owners do not have the desire or wherewithal to go through the federal and state registration process, they must find an exemption at the federal and state level upon which to rely. The implementation of Regulation A+ created a new possible exemption.
Regulation A+ provides two “tiers” under which eligible companies may raise money. Under Tier 1, a company may raise up to $20 million in any 12-month period. With a Tier 1 offering, the offering company is not required to provide audited financial statements, there is no limit on the amount raised from non-accredited investors, and there are no ongoing periodic reporting requirements to the SEC; however, the company must comply with the blue sky laws of every state in which it raises money. Under Tier 2, a company may raise up to $50 million in any 12-month period. With a Tier 2 offering, the offering company must provide two years’ worth of audited financial statements, there are certain investment limits on non-accredited investors, and there are ongoing periodic reporting requirements to the SEC; however, the company will be exempt from blue sky law compliance (but will remain subject to state filing requirements and anti-fraud authority).
While Regulation A+ opens new doors for companies seeking to raise money, it is designed for larger offerings. With each Regulation A+ offering and sale, the offering company must draft and submit certain documentation to the SEC (and state agencies, if applicable), including but not limited to an offering statement, along with an offering circular. This can be expensive and complicated, but Regulation A+ is not the only exemption available to businesses that want to raise money. For example, there are other, less cumbersome exemptions available for smaller offerings and offerings that take place exclusively in one state.