Regulation A+ allows private companies to raise funds from the public up to a certain limit and is suitable for companies considering plans to increase their capital. Before enjoying its benefits, however, companies must undergo a tedious approval process through the Securities and Exchange Commission (SEC). Preparing an offering together with several legal requirements is a challenge, but the advantages of Regulation A+ can be well worth the approval process.
In the past, accredited investors were the only group of individuals with access to investing in private startups. Accredited investors are individuals who have made $200,000 in annual salary for at least the last two years, have made over $300,000 in joint annual salary with their spouse for at least the last two years, or have more than $1 million in net worth, not including their primary residence. These requirements made investing in startups incredibly difficult for the majority of the public. In 2012, with bipartisan support, legislations was passed which enacted the Jumpstart Our Business Startups Act, loosening regulations for companies trying to raise funds. Regulation A+ took effect in June of 2015, amending Regulation A as part of implementing the JOBS Act, allowing both accredited and non-accredited investors to invest in private business enterprises.
What is Regulation A+, and how does it work?
The Securities and Exchange Commission defines Regulation A+ as Regulation A's expanded version. Although the latter is a rarely used offering, Regulation A+ expounds its amendments based on recently adopted SEC rules. This regulation is also an alternative to a small registered IPO. Regulation A+ complements the rest of the securities offering methods exempt from the registration requirements of the Securities Act of 1933.
Regulation A+ provides progressive and innovative changes based on the existing Regulation A framework. Recent changes created an exemption for companies based in the US and Canada to raise $75 million over a year period. Any sales of securities managed by existing stockholders also qualify for the exemption with some limitations on the amounts of funds available. Regulation A+ requires companies to file disclosure documents on the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, or EDGAR. Full confidentiality is guaranteed by facilitating the review of offering documents within EDGAR’s platform.
Regulation A+ divides offerings into two tiers. Tier 1 includes securities offerings of up to $20 million within 12 months, while Tier 2 set its securities offering limits to $75 million within 12 months. When securities offerings reach around $20 million, a business can choose between Tier 1 and Tier 2. Both tiers are subject to all requirements, but Tier 2 requires additional disclosure and ongoing reporting. According to recent studies, 60% of companies that apply for Regulation A+ prefer Tier 2 over Tier 1.
Under both tiers, an issuer must file an offering statement on Form 1-A with the SEC. An offering statement includes an offering circular, the primary disclosure document for investors. Investors must receive an offering circular, or at least a way to access it. An issuer can only accept payment for sale of securities once his or her offering statement is qualified by the SEC. The SEC’s qualification, however, does not mean that the SEC has approved a securities offering. The SEC also does not assess the accuracy or completeness of any offering documents or solicitation materials.
With Tier 1, an issuer can raise up to $20 million in any 12-month period, including no more than $6 million on behalf of selling securities holders affiliated with an issuer. In addition to qualification by the SEC, a company offering securities pursuant to Tier 1 of Regulation A will also need its offering statements qualified by state securities regulators in each state where an issuer plans to sell securities. A company offering securities under Tier 1 does not have ongoing reporting requirements other than a final report on Form 1-Z on the status of the offering.
Tier 2 is the more common issuance under Regulation A. Under Tier 2, an issuer can raise up to $75 million in any 12-month period, including no more than $22.5 million on behalf of selling securities holders affiliated with an issuer. Unlike Tier 1 offerings, a Tier 2 offering statement does not require qualification from state securities regulators. An issuer using Tier 2 is also subject to ongoing reporting requirements in the form of an annual report on Form 1-K, a semiannual report on Form 1-SA and a current report on Form 1-U. Importantly, investment limitations exist for offerings under Tier 2 if securities offered are not listed on a national securities exchange upon qualification. An investor must either be an accredited investor or is limited in how much he or she can invest to no more than 10% of his or her annual income--alone or together with a spouse--or net worth--excluding the value of the person’s primary residence and any loans secured by the residence up to its value.
Regardless of a company’s tier, it must file with the SEC to launch a mini-IPO.
Who Can Take Advantage of Regulation A+?
Regulation A+ is suitable for a company looking to raise its capital between $3 million and $75 million. Costs for the facilitation of Regulation A+ might be overwhelming for some. As a result, this regulation is less likely to be beneficial for smaller fundraising efforts of less than $3 million. That said, here are entities that will most likely benefit from Regulation A+:
Companies with a Large Customer Base
One of the most valuable assets of a company in a Regulation A+ offering is its user base, as a large user base generally results in a high potential for profitability. When seeking investments, companies with a large customer base could potentially attract more investors due to an existing track record of success.
Companies Wanting To Increase Their Exposure
The goal behind launching Mini-IPOs under Regulation A+ is not limited to raising capital. A company can also increase its exposure and brand awareness. Leveraging Regulation A+ offerings to significant events like product launches is an effective way to build relationships with new customers. This opportunity is a company’s chance to market its brand and build its reputation.
Some potential issuers are not eligible for Regulation A+: “Exchange Act reporting companies; certain investment companies; companies without a specific business plan or with a business plan that involves a merger or acquisition with an unidentified company; issuers seeking to sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights; companies subject to “bad actor” disqualification rules; and companies that have been subject to any order of the Commission under Section 12(j) of the Exchange Act in the past five years or that have not filed required ongoing reports in the past two years” (Knyazeva, 2016).
What is the Regulation A+ Qualification Process?
Once a company has taken on a mini-IPO under Regulation A+, it is required to submit a financial statement audited by a certified accountant. A company should also file and complete Form 1-A with the SEC.
Valuable attachments to Form 1-A consist of a description of one’s business and its executive officers, financial statements, an offering circular, risk factors, use of proceeds, securities offered, and more. This process is often overwhelming, which is why some companies consult with third-party providers to ease their burden. Requirements must be evaluated before submitting a finalized prospectus.
How Long Does Qualification Take?
Obtaining securities under Regulation A+ can take different amounts of time depending on a company’s circumstances, but most companies can expect results in these approximate times: 30 days for gathering and compiling all necessary documents for a registration statement; 30 days for completion of Form 1-A, along with disclosure documentation; and three to four months for qualification results.
What Comes Next After Raising Capital?
If a company fails to raise its capital, any committed funds automatically return to its investors. If a company succeeds, however, raising money under Regulation A+ requires three ongoing reporting requirements:
1. Annual Reports
An annual report contains information about business operations and transactions made over the past year. A company must provide a comprehensive analysis for the year together with two years of audited financial statements.
2. Semi-annual Reports
A semi-annual report consists of three documents: unaudited financial statements, management discussion, and analysis for every six months.
3. Event Reports
Event reports refer to a document drafter when a material change to shareholders' rights or a business’ nature occurs within a company.
Businesses composed of fewer than 300 shareholders are given a choice to opt-out of reporting requirements. Such a business can refuse to submit both semi-annual and event reports as long as it files its first annual report. Alternatively, companies holding greater than 300 shareholders with either a public float of more than $75M--held by non-affiliates--or annual revenue greater than $50M can go two years without complying with reporting requirements.
Advantages of Regulation A+
The median legal cost associated with raising funds is about $40,000 - $60,000 based on all filings (Crawford, 2019). Tier 2 offerings often have higher fees, but fees associated with a Regulation A+ offering are often much lower than a traditional IPO. A Regulation A+ offering also entails fewer disclosure requirements. By raising small amounts of money from many different investors, companies are often able to retain control instead of being controlled by a few dominant investors.