Potential Game Changer for Funding Awaits Final Approval From SEC
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Regulation A+, a little-discussed provision of the JOBS Act, would allow a company to raise up to $50 million selling stock to the general public through a mini-IPO that would not be overly expensive or burdensome from a regulatory perspective. Earlier this year, I boldly predicted that this provision could have a game-changing effect on how new and emerging companies raise capital once it went into effect.
As the law was written and the rules were proposed by the SEC, it might not cost a company much more to raise $50 million under Regulation A+ than it would cost to raise $1 million under the equity crowdfunding provisions of the JOBS Act.
At the time of my article, the SEC had proposed rules to enact Regulation A+, and the public was allowed to comment on the proposed rules. The public comment period has ended and we are all still waiting for the SEC to release its final rules so we know whether this potentially game-changing law will have the economic bite Congress intended, or whether the SEC will buckle under the pressure of state regulators and make Regulation A+ a virtually useless piece of legislation like its predecessor, Regulation A.
Hopefully, these SEC rules will keep Regulation A+ as a powerful tool for funding small businesses. To do so, I hope we find the following in the final rules when they are rolled out:
1. No state Blue Sky compliance. The SEC got this one right in its proposed rules, but state securities regulators are not happy and have flooded the SEC with comment letters and lobbyists trying to get the SEC to reverse its position. If the SEC changes its mind and requires a startup company to register the Regulation A+ offering in all 50 states, the new law will likely be as worthless as the old law to most companies.
The expense and regulatory nightmare of dealing with 50 states and their securities laws is totally unnecessary, given the SEC's disclosure requirements for any company to use Regulation A+.
2. The ability to sell to the general public. Regulation A+ allows a company to sell stock through a mini-IPO to the general public, with the limitation that each purchaser cannot invest more than 10 percent of their annual income or net worth in a Regulation A+ offering. Some states and other commentators want the purchasers of Regulation A+ offerings to be limited to accredited investors or others who are wealthy and connected.
If the SEC changes its position and limits purchases of Regulation A+ stock to rich folks, the "public" part of the initial public offering would disappear, and there would be little reason for a company to use Regulation A+ instead of Regulation D, the most popular private-equity exemption presently in use. If this happens, Regulation A+ will sit on the shelf collecting dust next to Regulation A, the law it is supposed to replace.
3. A streamlined process. One of the reasons Regulation A has failed to be a viable method of raising capital is that it reportedly takes an average of eight months to go through the SEC process needed to make a Regulation A offering. To make Regulation A+ work, the SEC needs to make the document filing, compliance and other regulatory issues easier by streamlining this process. A startup business cannot wait eight months to do anything, much less raise capital.
4. The law's original intention. The SEC did a fantastic job in its proposed rules of making Regulation A+ a viable model for small businesses to raise money. It apparently took the mandates of Congress seriously by removing Blue Sky compliance, allowing a company to raise up to $50 million, and allowing anyone to be an investor within the income limits proposed.
This law was proposed to give the small business and entrepreneur community a game-changing way to raise money and to give the lower-end IPO market a much-needed boost. When the final Regulation A+ rules roll out, let's hope Congress remembers that this law was created to help small business raise capital, and at the same time, to stop state governments from imposing costly fees and needless repetitive regulations that strangle startups and emerging companies.