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How to use Regulation A+ to raise up to $50 million capital

How to use Regulation A+ to raise up to $50 million capital

How to use Regulation A+ to raise up to $50 million capital

When the Securities and Exchange Commission (SEC) approved the changes to Regulation A, it has generated lots of debate and discussion. The new rules on Regulation A+  took effect last  June 19th.

The rules are expected to create a new category of quasi-IPO. This will enable companies to raise money from the public at less expense compared to a regular IPO.There are however some important points to keep in mind.

The old Regulation A had such low limits for fundraising as well as high compliance costs that it was rarely used. The limit was only $5 million, and companies had to file offerings in every state in which they were selling the securities.

The new Regulation A+ creates two categories namely, $20 million for the existing Tier 1, and a new Tier 2 – raising up to $50 million, of which $15 million can be offered to existing shareholders. Tier 2 offerings will not require company review by every state, and this will considerably reduce the cost of compliance.

Startup company in their early stage.

Startup company in their early stage. | PIXABAY.COM

The opportunities created by the new regulations are not going to work for every company.  It will be appropriate solutions only for certain companies looking for an intermediate step between venture capital and going public.

This may not be the best funding option for startup companies in their early stages. Regulation A+ imposes certain filing, reporting, and preparation requirements though nowhere near as stringent as real IPOs.

These requirements are definitely well beyond the information that potential venture capital or angel investors would require. For many startup companies, this can be too expensive or time-consuming to be realistically undertaken.

Regulation A+ in comparison to a Reg D offering

Regulation A+ in comparison to a Reg D offering | PIXABAY.COM

Clearly, these offerings are going to take their toll both on time and money. Though the disclosure requirements are not as stringent as requirements for IPO, they are still quite significant.

It is expected that the time taken for SEC review from start to finish could well run into several months. The costs of preparing and submitting audited financial statements for small and medium enterprises could be between $5,000 to $75,000 and legal fees will have to be incurred on top of the other costs.

It would be fair to estimate the total cost of a Regulation A+ offering will come to high five figures or low six figures though this will still be modest compared to IPOs costs which could well be in excess of $1 million according to data from PwC.

Clearly, there are benefits from Regulation A+ offerings which could make it a preferable option for some companies. The company can publicly advertise their offerings and raise money from both accredited and non-accredited investors.

The securities are unrestricted meaning that they can be resold. Many companies can take the opportunity to create liquidity through small secondary markets created on alternative platforms.

This will also give them an opportunity to gauge the appeal to large institutional investors. These benefits mean that it will be worth the time and cost for some companies to put together these offerings.

Benefits from Reg A+ offerings

Benefits from Reg A+ offerings | PIXABAY.COM

The new Regulation A+ creates two categories namely, $20 million for the existing Tier 1, and a new Tier 2 – raising up to $50 million, of which $15 million can be offered to existing shareholders. Tier 2 offerings will not require company review by every state, and this will considerably reduce the cost of compliance.

 

About David Drake

David Drake, Contributing Journalist.Reach him directly at David@LDJCapital.com.

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