For growth-minded startups, capital is everything. Traditionally, this capital has come from angel investors, venture capital, friends, family, and frequently, from a loan or an entrepreneur’s personal funds.
But in 2015, the SEC amended and expanded Regulation A, a rarely used rule that lets companies offer securities that are exempt from the cumbersome requirements of the Securities Act of 1933. The resulting changes, commonly referred to as Regulation A+, are increasingly being used by startups as a “mini” initial public offering.
Is a Regulation A+ offering right for your startup? Here are a few high-level points to consider.
Is my startup eligible for a Regulation A+ offering?
One of the most frequently asked Regulation A+ questions is who is eligible for an offering. The answer is fairly simple – outside of limited carveouts for bad actors, blank check companies, and certain investment and business development companies – any public or private company registered in the U.S. or Canada is eligible to raise capital under Regulation A+.
What Regulation A+ tier is better for a startup?
Regulation A+ has two tiers, Tier 1 and Tier 2. Both tiers let startups raise capital from accredited and non-accredited investors, but there are several important differences that should be closely examined.
Tier 1 has a $20 million offering limit in any 12-month period, and additional flexibility for investment marketing. The advantage of using Tier 1 is that there are no ongoing SEC reporting requirements, and no investment limits for non-accredited investors. However, in exchange for this flexibility, companies are required to comply with Blue Sky Laws, which means they need to register in every state in which they plan to raise capital. This can be costly, time consuming, and the securities compliance rules in individual states can be quite a burden.
If a company wants to raise more than $20 million without having to comply with Blue Sky Laws, Tier 2 is the most viable option. Under Tier 2, companies can raise up to $75 million in any 12-month period. However, Tier 2 makes companies subject to ongoing SEC filing requirements, which include the filing of annual reports (audited financial statements), semi-annual reports (unaudited financial statements and management discussion and analysis), and event reports (a report of events that have a material impact on the company).
Is Regulation A+ right for me?
Traditionally, only accredited investors were allowed to invest in early-stage companies. Accredited investors have $200,000 in annual salary for the last two years (or $300,000 in joint salary for a married couple) or have a net worth of at least $1 million. But Regulation A+ gives companies the much-needed flexibility to raise capital from accredited and non-accredited investors.
If your company wants to raise capital from the public, and it does not want to go through the lengthy and costly process of an IPO, Regulation A+ is an option to consider. This “mini” IPO offering still needs to be qualified by the SEC, but the process doesn’t cost as much, and its less cumbersome than a traditional IPO.
Article by Muhammad Junaid, Senior Tax Manager
