The JOBS Act Provision That Could Change IPOs Forever
There is excitement on "Main Street" about equity crowdfunding democratizing the investment process. Most people are unaware of another provision of the JOBS Act that could have a much larger impact on entrepreneurs and small businesses: Regulation A+. This provision will allow entrepreneurs to raise up to $50 million in a simplified form of an initial public offering.
Depending on how the SEC rules look when finalized, raising $50 million under Regulation A+ could have a similar cost and require nearly the same regulatory compliance required to raise only $1 million under the JOBS Act “equity crowdfunding” proposed rules. If the SEC keeps its proposed Regulation A+ rules intact, I will give this JOBS Act provision an A+ grade.
When congress passed the JOBS Act in 2012, they tried to fix Regulation A, a little-used provision of federal law that permits new and emerging companies to raise up to $5 million in a public offering. Regulation A is rarely used because it requires a company to register their public offering in every state where it is offered. The cost of complying with every state’s “Blue Sky Laws” makes Regulation A unattractive, given that more commonly used laws such as Regulation D allow a business to raise the same amount of money and not have to deal with 50 different state regulators and expensive state-by-state compliance. This is one time where a D is better than an A.
In the JOBS Act, Congress attempted to fix Regulation A by amending it. The new version had been dubbed Regulation A+. Congress increased the amount that can be raised from $5 million to $50 million a year, and removed all state registration and compliance requirements. Under Regulation A+, a small business must only sell their stock to “qualified purchasers.” The good news is the SEC proposes making everyone who wants to buy the stock, including anyone in the general public, a “qualified purchaser.”
Regulation A+ seems like a great fit for most small and emerging businesses. In fact, it could be a game-changer for the way small businesses are funded.
Unfortunately, Regulation A+ has some opponents. Not surprisingly, state securities regulators are unhappy that they are being cut out of the picture. These bureaucrats want the SEC to require a small business to register and follow the law of every state where they wish to sell their stock. Some even want the SEC to define the term “qualified purchaser” to mean an “accredited investor,” thus limiting the sale of stock to investors with annual incomes greater than $200,000 or a net worth of more than $1 million.
If the SEC succumbs to these critics, Regulation A+ will end up sitting on a shelf collecting dust like its elderly father, Regulation A. For less money and regulatory effort, a small business can use Regulation D to raise the same amount of money with a private offering limited to accredited investors. If a company can’t sell its Regulation A+ stock to the general public, there will be no reason whatsoever to use this exemption.
Regulation A+ offerings will only be an attractive means of raising capital if the proposed SEC rules remain intact, making these offerings exempt from state Blue Sky laws and keeping “qualified purchaser” defined to include any member of the general public who wants to purchase the stock.
We are in the middle of a 60-day comment period where the SEC allows the public to submit its opinions online. You can read my comment to the SEC on Regulation A+ here, in which I ask the commission to pass the rules without requiring state compliance and allowing the general public to purchase stock in these offerings. You can submit your own comment here until March 24.
I encourage everyone to submit a comment and to implore the SEC to define “qualified investor” as broadly as possible and to keep a company using Regulation A+ exempt from state Blue Sky laws. This law could help spur the economy with new businesses and new jobs.
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