The JOBS Act of 2012 was meant to loosen the regulations regarding private equity, opening up new classes of investors and freeing entities seeking new investment from solicitation rules put in place before color television existed. Many commentators have criticized the Securities and Exchange Commission for the years and months that have passed without regulations to implement the law. On the other hand, the SEC may have been practicing a deliberate gradualness that will only serve to strengthen the regulations when they do take effect, and Regulation A+, finalized in March, may be proof of that.
Federal law requires all offers to sell securities and all sales of securities to be registered unless and exemption to registration applies. Registration is generally complicated and costly, so companies offering securities may determine that conducting an offering under one or more of the exemptions is preferable. An offering exempt from registration presents other difficulties for the issuer, however. For example, a company conducting an offering under Rule 506(b) is prohibited from using general solicitation or advertising to market the securities, although it can sell it securities to any number of accredited investors (typically individuals and entities that meet certain wealth or income minimums) and up to 35 "sophisticated" purchasers. A company conducting a private offering under Rule 506(c), however, may conduct a more general solicitation effort, but it can only sell to accredited investors.
The new Regulation A+ provides companies with two additional options for selling securities pursuant to an exemption from registration. Reg A+, as it has come to be known, is an update of the existing Regulation A. Under Regulation A, a company can raise up to $5 million. Under Reg A+, a company may raise up to $50 million in a 12 month period and it may sell to both accredited and non-accredited investors, with some limited restrictions regarding the amount of a non-accredited investor's investment. Moreover, there are no restrictions on general solicitations and advertising under Reg A+.
The element of Reg A+ that should not be overlooked is the ability to court non-accredited investors. Accredited investors make up less than 1% of the population, so giving businesses a way to connect with the other 99% of the country gives them a far greater pool to draw from. Companies that do a Reg A+ offering can receive investment from the largest angel investor on down to the company's customers. The advantages of this are that companies with a strong community or customer base can tap into those personal connections for investments from those who believe in the company, rather than just those looking for a return on investment.
The regulation provides two tiers of offerings with differing governing criteria: Tier 1 allows a company to raise up to $20 million in a 12-month period through an offering of securities, while Tier 2 provides for an offering to raise up to $50 million. While both tiers are subject to rules of issuer eligibility, disclosure and other items in current Regulation A provisions, Tier 2 is also subject to a requirement to provide audited financial statements, a requirement to file annual, semiannual and current events reports, and a limitation that restricts non-accredited investors to only purchasing an amount of securities no greater than 10 percent of the higher of either the non-accredited investor's annual income or net worth.
Regulation A+ also comes packed with other items that will be helpful to small businesses. For instance, the regulation includes a feature that allows companies to "test the waters" for investor interest through general solicitation, including social media apps like Twitter. These tweets allow companies to solicit non-binding interest from investors and are not deemed a prospectus. While the SEC requires certain legends to be submitted along with such a solicitation, the agency issued a Compliance and Disclosure Interpretation ("C&DI") to suggest that these legends could be included in a hyperlink in the tweet.
The regulation also allows the issuer to make the initial filing of its Offering Statement confidentially, only to become public either when the issuer decides it should be or 21 days prior to when the SEC qualifies the offering. This gives the issuer more time to pull the offering together after filing, it keeps the issuer's business plan hidden from competitors while testing the waters, and it allows the issuer to bypass issues that could have arisen from the need to make material changes to the Preliminary Offering Circular.
Finally, Regulation A+ preempts state Blue Sky laws for Tier 2 offerings, easing the administrative burden of requiring Reg A offerings to be registered in every state the company's securities were offered. Tier 1 offerings must still file with every state in which a solicitation is made or an investor resides.
Small companies should look at Regulation A+, which became effective on May 25, 2015, as a throwing open of the floodgates to private equity, tapping into a vast and heretofore underexploited resource of capital. The fruits of the JOBS Act are finally ripening, and each new SEC reg under the law will likely open the door to easier capital formation.