The way private companies raise money is about to change. Starting on June 19, 2015, companies will be able to raise up to $50 million a year from both accredited and non-accredited investors under the recently modified SEC Regulation A — what many people are now calling Regulation A+, or ‘IPO-lite.’ These new rules will create an intermediate step between being private and going fully public, and they present an exciting opportunity for those companies that are ready to take advantage of them.
The old Reg A was almost never used. Companies were only allowed to raise up to $5 million, and offerings had to comply with state securities laws in every state where the securities were sold. Consequently, $5 million simply wasn’t enough for most companies to justify jumping through all those hoops.
Spurred by the 2012 JOBS Act, the SEC has created a new two-tier fundraising system with the new Reg A+. Both tiers have their appeal. In a Tier 1 offering, companies can raise up to $20 million in 12 months, up to $6 million of which can be sold by existing shareholders. Tier 1 offerings must still comply with state securities laws (the so-called ‘blue sky’ laws).
Using Tier 2, issuers can raise up to $50 million (up to $15 million by existing shareholders), and state securities laws are pre-empted. The catch lies in the reporting requirements — companies using Tier 2 must submit audited financials with their SEC filing, and make ongoing reports to their new shareholders after the offering is completed.
On the investor side, both Tier 1 and 2 offerings can be presented to accredited and nonaccredited investors, yet nonaccredited investors are limited to investing 10% of their annual income or net worth, whichever is greater. Nonaccredited investors have to self-certify compliance with this limit while committing to an IPO-lite investment opportunity.
Tier 1 offerings will most likely work best for smaller, earlier-stage companies that have raised some money from angel investors or venture capital already, but are still some years from contemplating a full IPO. Because these offerings will have to comply with state securities laws, they’ll be most useful for companies that can draw on a localized base of investors in one or two states.
Companies can use the North American Securities Administrators Association’s (NASAA) coordinated review program for these offerings, but this program is new, it hasn’t yet been adopted by every state, and it remains to be seen how smoothly it will work. For now, it’s best to assume that you’ll need to go state by state to qualify your Tier 1 offering — and to limit the number of states you plan to sell in.
A Tier 2 offering, because of its higher fundraising limit and more stringent reporting requirements, will be best suited to a somewhat larger, later-stage company — a company that has already completed a couple of venture funding rounds, perhaps, and is starting to think about going public. For these companies, the time and expense of pulling together audited financials and ongoing reports won’t be too burdensome. In fact, it may be a useful preparation for an eventual full IPO, making this type of offering an intermediary step on the road to going public.
Testing the Waters
Reg A+ offerings can be publicly advertised and, with certain restrictions, can even be presented before filing your offering documents with the SEC. Meaning that, starting on June 19, if your company is considering an IPO-lite offering, you’ll be able to, for instance, use social media and other communication channels to let the public know you might be raising capital, allowing you to see what type of response you get. This stage of preliminary outreach is called ‘testing the waters’ and is specifically provided for in Rule 255 of the new Reg A+, “Solicitations of interest and other communications.”
Keep in mind that these early communications will be subject to anti-fraud laws, so they should be simple, clear, and free of any claims about the future success of your business. You’ll also need to include, or link to, some disclosure language that lets investors know you aren’t accepting any money or orders to buy securities, that you won’t be accepting orders until the SEC has reviewed and “qualified” your offer, and that nothing investors say at this stage will be considered a commitment to a later purchase.
Filing with the SEC
When you’ve decided your company is ready to proceed with an offering, you’ll need to put together a formal offering circular, known as Form 1-A. This form is to be filed electronically through the SEC’s EDGAR system, along with any exhibits you want or need to add.
The form needs to include basic information about the issuer, a statement about what your business does, who makes decisions for it, and how the proceeds of the offering will be used. For a Tier 2 offering, you’ll need to include audited financial statements for the past two years (or since inception, if your company is less than two years old). Tier 2 also requires companies to file semi-annual and annual financial reports after the offering closes, as well as event reports announcing major changes such as changes in the rights of shareholders, the departure of important officers, and so on.
Altogether, the filing and reporting requirements are much more stringent compared with private offerings under SEC Regulation D. But the potential benefits of this new type of IPO-lite offering should be clear. Not only does Reg A+ allow companies to raise money from nonaccredited investors — without going fully public — it also allows founders and other early investors to get some liquidity.
Reg A+ can be considered a way to, essentially, prepare for an eventual IPO. Companies will be able to discuss their offerings relatively freely, and see how much interest they receive from a broader market beyond the usual angel and venture capital suspects. Investors’ response to a Reg A+ offering could be an invaluable early clue to the public’s likely response to a full IPO.
Those companies who can afford to put in the time and money to conduct this kind of offering should take a good look at Reg A+ and work with a securities lawyer, or related specialist, to understand the specifics of testing the waters and filing with the SEC. Also, it’s recommended you start looking for a FINRA registered broker-dealer that’s approved to sell your securities.
Slowly but surely, the JOBS Act is changing companies’ options to raise capital for the better.
As CEO of Venovate, Michael Raneri regularly writes about topics related to capital formation, private securities, and alternative investing. You can follow him on his blog, Linkedin, and Twitter @mraneri.