The SEC has implemented Title IV of the JOBS Act, Regulation A+. This is an update on Regulation A.
Chief Deputy Whip Patrick McHenry (R, NC-10), the Vice Chairman of the House Financial Services Committee, released the following statement on the Securities and Exchange Commission’s (SEC) adoption of rules on Regulation A+ or Title IV of the JOBS Act:
“While I continue to review the details of the finalized rule I am encouraged the Commission has taken action on Reg A+. For too long the JOBS Act has been bogged down by Washington bureaucracy impeding the promise this law possesses. While today’s vote is an important step in enhancing the ability of American entrepreneurs and small business to access capital, we still must do more to help entrepreneurs secure the financial support they need to fund their ideas, create jobs and grow our economy.”
The original Regulation A rule was rarely used. Currently, under this rule offerings are required to be registered or exempt from registration in each state where the offering is made, in addition to SEC review. So if a Regulation A offering is made in 10 states, there would be 11 separate securities law analyses conducted, one by each state as well as the federal securities process. It is bureaucratic, costly and time consuming.
Regulation A only allowed companies to sell $5 million worth of stock, $1.5 million of which can be offered by current stock owners. And issuers were required to file the offering and pay fees in every state in which they are selling.
Mary Jo White, SEC Chair, commented:
“These new rules provide an effective, workable path to raising capital that also provides strong investor protections. It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
The Regulation A rule is split into two tiers. Tier I includes an offering of up to $5 million over a rolling 12 month period, which is essentially the current Regulation A exemption. Tier II, Reg A+ which has just been reviewed by the SEC, is an offering up to $50 million over a rolling 12 month period. Tier II also preempts state securities regulatory review. Tier II offerings will also be subject to annual audits, semi-annual updates and reporting on other material events.
Regulation A+ makes two significant changes. The first is that non-accredited investors have the chance to invest in shares in a regulation A+ offering but they are limited to 10% of their net worth or income (whichever is greater), no limits apply for accredited investors. Originally only accredited investors, those with $200,000 of income a year or with a net-worth of $1 million, could invest.
The second is that companies can now enter the public market and raise up to $50 million a year, whereas Regulation A only allowed companies to sell $5 million worth of stock. This new regulation will be a more cost effective way for companies to raise capital than an IPO. It is being called “IPO Lite”. This will also allow investors in the companies to gain liquidity on their original investments without the company having to IPO. And so may also stop companies from going public too early under pressure from investors desperate for liquidity. Unlike securities issued in a Regulation D private placement (SEC Rule 506) the securities will not be restricted and will be able to trade immediately in all 50 states.
Michael Raneri, founder and CEO of Venovate, explained:
"With the new Regulation A+, the SEC is creating an intermediate capital formation step on the road to going public. It's a new kind of 'IPO-Lite' that will be beneficial for companies and investors alike. With more companies delaying IPOs because of the cost and regulatory burden, this will be a welcome chance to find new meaningful sources of capital, as well as liquidity. And for investors, the new Regulation A+ will offer a valuable opportunity to gain access to exciting new companies at an earlier stage in their growth. At Venovate we have been eagerly anticipating this regulatory development, and, in cooperation with our partner CrowdCheck, we're fully prepared to welcome both issuers and investors interested in Regulation A+ offerings to Venovate Marketplace."
All focus had previously been on Title III as the legislation that would change crowdfunding, however, Title IV being passed renders this almost defunct. Non-accredited investors are able to get involved in crowdfunding. However, the definition of crowdfunding under Title IV has changed slightly. In order to raise funds under Title IV platforms have to be a registered broker-dealer (or affiliated with a broker-dealer) and file with FINRA as well as having a certain level of net capital. The companies who are raising capital are required to provide more financial information and need to be approved by the SEC. This gives investors an added level of assurance and is a way to regulate what non-accredited, less sophisticated investors are putting their money into.
The new rules will become effective 60 days after publication in the Federal Register, a process that usually takes between 5-15 days, and so the Final Rules should become effective by mid-June 2015. This is an important step for businesses raising capital and will be a new stage on the road to going public. It is the first time non-accredited investors will be able to invest in companies and so adds significantly to the pool of potential capital available to businesses.