By David Drake
In a bombshell announcement, the SEC has just released the final form of Regulation A+ rules relating to Title IV of the JOBS Act, under which it has priority over state regulation for Regulation A offerings up to $50 million and stipulates co-ordinated reviews for offerings up to $20 million. Companies on a fast growth trajectory will soon have the ability to raise up to $50 million by directly approaching unaccredited investors much like an IPO, providing a potent alternative to sources of institutional financing such as venture capital.
Many people were convinced that Title IV was the most potent game changer in the JOBS Act but had serious concerns about the expense and complications of State securities law which would require securities to be registered in every state in which they are sold. However, in their draft release of the proposed rules in December 2013, the SEC cleverly used a loophole to get around State securities law. In this final version, the SEC has settled the problem with a compromise which continues the pre-emption for Tier II offerings up to $50M while simultaneously enhancing Tier I offerings from $5M to $20M and thus provides a chance for “coordinated review” to prove that it works.
In arriving at this compromise, the SEC has pointed out that because the coordinated review concept is new and has to be tested, some form of pre-emption is necessary until this process has been proven. However, coordinated review has a great deal of promise provided that states can get their act together and make it work. However, it should be noted that states will keep complete jurisdiction in addressing all issues relating to enforcement and anti-fraud.
Main Points of the New Regulations
Maximum high enhancements: Issuers can raise up to a maximum of $50 million in a period of 12 months for Tier II offerings and a maximum of $20 million for Tier I offerings.
Investors and limits in investment: Investment is no longer restricted to accredited investors and anybody can invest. However, individual investors using Tier II offerings are permitted to invest up to the greater of 10% of their net worth or 10% of net income per offering. There are no limits on investments for Tier I offerings.
Income/net worth eligible for self-certification: Unlike Rule 506(c) under Title II of the JOBS Act, investors will be permitted to certify their income or net worth themselves for application of the investment limits. Consequently there will be no irksome documentation or processes required to establish income or net worth.
Issuers can advertise offerings: There are no restrictions on solicitations in general which means that issuers are free to advertise their offerings on TV and on social media. However, Offering Circulars require the approval of the SEC prior to commencing sales so that issuers will have to file disclosure documents and audited financials to obtain this approval. This could possibly lead to a delay factor.
Audited financial and disclosure requirements: For Tier II offerings, along with the Offering Circular, the issuer will need to submit audited financial statements for two years while Tier I offerings require only submission of reviewed financials which need not be audited. There is a provision for issuers to “test the waters” to gauge investor interest in the proposed offering before committing the resources and time required to prepare the Offering Circular. Potential investors can express their interest but cannot actually invest.
As for disclosure requirements, issuers of Tier II offerings will have to file annual disclosure filings, semi-annual reports and current reports as well as audited financials. These disclosures can be discontinued after the expiry of the first year is the number of shareholders drops to below 300. There are no continuing requirements for issuers of Tier I offerings.
Pre-emption of state law: The old Regulation A (now Tier I) was not practicable for use because the securities had to be registered in every state in which the sales offering was made. The new regulations are a major step forward in making life easier (and less expensive) for issuers.
Other highlights: It would appear that Section 12(g) shareholder limits (2,000 persons and 500 non-accredited investors) will not apply to Regulation A offerings under certain conditions which would fix the major problem of limiting very small investments for example $100.
The securities will be freely transferable and unrestricted and this could lead the way to secondary trading on Venture Exchanges.
Regulation A+ is likely go into effect 60 days after publication in the Federal Register expected in June 2015. Once these regulations go into effect, entrepreneurs will be presented with the opportunity to raise millions of dollars simply and affordably from crowdfunding which will provide a major boost to the crowdfunding industry as a whole.
What the Experts Predicted
Scott Purcell, CEO of FundAmerica, a co-founder of one of the leading crowdfunding organisations and a leading advocate of crowdfunding for equity, had this to say when asked some time ago about what would happen if crowdfunding for equity in the USA became legal: “It will change the world. Yes, literally. Crowdfunding for securities (debt will be MUCH larger than equity) will enable millions of businesses to get the capital they desperately need to grow and create jobs. This will usher in a boom period the likes of which this country, and the world, has never seen.”
Similarly, legal expert Scott Andersen of consultDA (with 20 years experience as a prosecutor with the Financial Industry Regulatory Authority (FINRA), NYSE Regulation, Inc and New York State Attorney General) had earlier made the following comment:
“Congress, by allowing general solicitation and advertising in the capital formation process, opens broad possibilities for entrepreneurs and new and seamless investment opportunities for the public.”
¹IN FULL DISCLOSURE, SCOTT ANDERSEN AND I RECENTLY FORMED AND ARE PARTNERS IN A SECURITIES COMPLIANCE CONSULTANCY FOR BROKER-DEALERS, INVESTMENT ADVISERS AND OTHER FINANCIAL INSTITUTIONS: CONSULTDA.COM.
David Drake is an early-stage equity expert based in New York City. He is the founder and chairman of Victoria Global Corporate Communications; LDJ Capital, a family office and private equity advisory firm; and, The Soho Loft Media Group, a global financial media company with divisions in Publications and Conferences. He is also a Partner at ConsultDA. You can reach him directly at David@LDJCapital.com.