On Wednesday, the Securities and Exchange Commission (SEC) adopted final rules to facilitate smaller companies’ access to equity capital through small-company public financial marketplaces mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act. As we reported nearly 18 months ago, these rules are long past the required issue date the law required. The new regulations (dubbed Regulation A+) address the issue of how the investment opportunities of the JOBS bill will be opened up to investors who don’t fit the current definition of a “qualified” or “accredited” investor.
To discourage high-risk investing in early-stage companies, investments regulated by the SEC and state regulatory agencies require investors in such companies to be “accredited.” Simply stated, this means they must have a high net worth to demonstrate their ability to withstand the failure of the company. Regulation A+ does not require the investor to have a specific networth, rather it limits investment by individuals to no more than 10 percent of the greater of the investor’s annual income or net worth.
The regulations 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. “These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
The 2 Tiers of Regulation A+
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.
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 final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).
The rules will be effective 60 days after publication in the Federal Register.
Investor and Owner, Beware
While there are obvious benefits of opening up what some are calling a “Mini IPO” marketplace, there typically is a period of Wild West days when any new investment opportunity arises. There will be scams and frauds, as there will also be the ability to raise capital in a creative and innovative fashion. But at what cost? Going public, even if it’s in a “mini” way, piles on a wide array of financial, legal and disclosure needs that can suck up a big portion of the founder’s time and energy. Before accepting investors and each quarter thereafter, you will be required to issue public documents that will be available to your customers, employees and competitors regarding the revenue, costs and earnings of the company. You will be giving up the types of flexible management that make it easy for small companies to “pivot” when a new opportunity arises. After a Mini IPO, before any such changes in plan, you will have to take into consideration the commitments the company has made to investors.
In other words: This is not something you should enter into lightly. You want to consider it with the guidance of your team of trusted legal and financial advisors.