Abbreviated by those in the know as “Reg A,” it gives small companies the ability to quickly and easily hold what’s sometimes referred to as a “mini IPO” or “IPO-lite.” As it was initially passed, Regulation A allowed for companies to raise up to $5 million from a public offering. However, the company then had to register separately in each state where the offering was to be sold, a clause which was both time-consuming and cost-prohibitive for many startups. Regulation A+, passed last week, raises the funding restriction to a maximum of $50 million and eliminates the need for separate state registrations. And, notably, these funds can be raised from the general public, not just from “qualified” investors with high net worths.
There are, of course, still protections in place, including limits on the percentage of an investor’s net worth that can comprise her investment. Companies must also disclose financial reports and submit to a background check in order to participate in the new funding options.
The new rules will go into effect 60 days after being published in the Federal Register.
Many in the crowdfunding world were waiting with great anticipation for the vote last week, unsure of whether the commission would move the chain forward for small businesses or whether they would cave to pressure from states to maintain a higher level of restriction. The SEC chose to uphold the original mission of the JOBS Act, which is that “companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations.” SEC Chair Mary Jo White on Regulation A+:
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.
Yet even the new rules don’t provide carte blanche for startups to raise huge public rounds unencumbered.
Marty Robins and Steven Papkin, of law firm FisherBroyles, LLP commented that the new rules “are likely to provide significant new options for middle market companies needing equity or debt capital” and “are likely to be especially helpful in areas like video games, food & beverage and entertainment,” as those have been particularly popular on crowdfunding platforms. However, both cautioned that the implementation of the new rules will still require professional guidance for startups wishing to maximize their effects.
Specifically, said Robins, “the extent to which [the rules will expedite the capital-raising process] is uncertain. Issuers and their advisors will need to monitor the SEC’s and state securities regulators’ application of the new rules to assess how they ultimately impact permitted investors, state filing practices and required specific disclosures.”
Scott Kupor, managing partner at Andreessen Horowitz in a question and answer session after his keynote at the 2015 Southeast Venture Conference in Charlotte, N.C. opined that “clarity is still needed” in terms of the accredited investor definition before crowdfunding platforms jump in to take advantage of the new regulations.
While we can’t predict how soon we’ll see news of ventures benefiting from the changes, Indiegogo may be the first of the crowdfunding platforms to jump into the sale of securities, rather than just rewards, potentially on a global scale. Co-founder and CEO Slava Rubin commented that he was “encouraged by the SEC’s progress towards finalizing equity crowdfunding rules,” as are many other businesspeople and investors today.