An A+ may be of interest to small businesses owners looking for investors.
No, it doesn’t have anything to do with grades in school. It is a way for SMBs to raise equity through crowdfunding.
Regulation A+ (more formally Title IV of the JOBS Act of 2012) officially became effective on June 15, 2015, as a way to allow small businesses to raise equity while bypassing time-consuming and expensive SEC registration and review standards required for non-accredited investors, i.e. those with annual incomes of less than $200,000 or a net worth of at least $1 million.
The regulations presume that only those investors with accredited income levels have the financial resources and acumen to shoulder risk responsibly and intelligently. Keep in mind that such SEC requirements came about as a result of the 1929 stock crash, back when $200,000 was worth a lot more.
As it happens, the federal government long ago recognized that SMBs couldn’t afford a full-fledged IPO. Back in 1936, it passed Regulation A, which eliminated a number of cumbersome financial reporting obligations and streamlined the registration and review process.
So why the need for an A+? Because individual states retained their regulatory review rights, which effectively canceled out the advantages of Regulation A.
It is interesting to note, as Locavesting reports, that there are some special cases where local government grants an exception that makes a Regulation A offering attractive.
The District of Columbia enacted an exemption to full securities registration requirements for small business. Commercial real estate developers Ben and Dan Miller conducted three Regulation A offerings in which local residents were able to invest in buildings going up in their neighborhoods for as little as $100.
Even then, Ben Miller describes the process as “slow, laborious and arduous.” And while many states have passed laws permitting local businesses to raise money from local residents, as The New York Times explains, the amount of money you can raise is relatively small, and there are varying restrictions that still make it a somehow onerous process.
Title II of the JOBS act essentially authorized online capital funding, or crowdsourcing. With Regulation A+, entrepreneurs can now solicit equity crowdfunding from non-accredited investors. According to The New York Times, SMBs can now conduct “mini-IPOs” via crowdsourcing websites and social media, allowing customers and others to buy shares in a company that is not, and may never be, publicly traded. Such “shareholders” bring several advantages:
- They become vested advocates of your company.
- They become more eager consumers of your products and services.
- They can provide valuable feedback and assistance about potential new markets as well further develop existing markets.
- They may be more interested in slower growth, lower-tier businesses than other private investors.
Most significantly, Regulation A+ raises the cap on how much money an SMB can raise, up to $50 million from $5 million, although those seeking more than $20 million are subject to more stringent reporting requirements.
Edgar Agents, LLC, notes that with the crowdfunding industry expected to double to $34 billion in 2015, the question isn’t whether companies should conduct a kick-starter campaign, by why they wouldn’t do so.
Related Article: Does Crowdfunding for Startups Actually Work?
Reasons to Consider Regulation A+
Besides greater and easier access to potential investors, one of the big benefits of Regulation A+ is that it allows small businesses to solicit potential interest without the expense of hiring lawyers and accountants to prepare an Offering Circular required by the SEC. According to Crowdfund Insider, the only requirements for the Offering Circular are:
- Include required SEC legend that indications of interest are non-binding.
- File the “testing the waters” materials only if and when you file a full-blown offering statement.
Additionally, Crowdfund points out that traditional venture capital lending doesn’t always operate totally in favor of the entrepreneur’s interests. “Crowdfunding helps to democratize the capital, putting the control, vision and direction of the securities industry back in the hands of the company.”
Related Article: Top Three Services to Crowdfund Your Project
Why A+ Might Not Make the Grade
Given that Regulation A+ has only just taken effect, there’s a lot that remains to be seen. While the intent is to reduce the time and hassle of extensive paperwork, it hasn’t eliminated filings entirely, nor the associated costs. Crowdfunding attorney Mark Roderick recommends budgeting $75,000 to conduct an offering, with an annual reporting cost of $20,000.
He also points out that an initial Regulation A+ public offering could take up to six months. In comparison, following a Title II offering of the JOBS Act wouldn’t exceed $10,000 and could be started in as little time as a week. In addition, different rules apply depending on whether you are raising up to $20 million or more than $20 million.
Bottom line: If you don’t need or want non-accredited investors, Regulation A+ might not be the way to go. In the meantime, if you’re thinking about it, keep thinking for a while if you can. As more companies try out the Regulation A+ route, the better sense you’ll get of what is actually working, and what isn’t, and how that fits with your own company’s objectives and needs.