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Paul Zimmerman

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Regulation A+ deserves a “D” for Disappointment

Ordinary investors have largely been excluded from opportunities to invest in tech startups due to federal securities laws. Under the Securities Act of 1933, issuers could sell their securities without burdensome disclosure requirements by selling exclusively to “accredited” investors: entities with over $5 million in assets or wealthy individuals with annual income exceeding $200,000 (or $300,000 combined with spousal income) or has a net worth over $1 million (excluding primary residence). If issuers wished to sell to non-accredited investors, they would need to file a registration statement with the SEC or, alternatively, distribute a lengthy financial disclosure document to investors.  As a result, startups raised equity capital generally from accredited investors. The masses were excluded.

Recently, the Securities and Exchange Commission (SEC) expanded Regulation A, now colloquially referred to as “Regulation A+,” which many hoped would address these concerns. Under Regulation A+, companies could raise up to $50 million from accredited or non-accredited investors with less reporting obligations than an IPO. 

There are two tiers for Regulation A+ offerings: Tier 1 and 2. Tier 1 is available for securities offerings of up to $20 million in a 12-month period while Tier 2, with securities offerings of up to $50 million in a 12-month period.

Tier 2 has some additional requirements including the necessity for companies provide audited financial statements, file annual semiannual and current event reports,  a limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10% of the greater of the investor’s annual income or net worth.

Regulation A+ would be limited to companies in the U.S. or Canada, who are not already SEC reporting companies, and who have not indicated intent to engage in a merger or acquisition with an unidentified company.

However, while Regulation A+ includes less onerous disclosure requirements than typical IPO filings, they still require the company to prepare a substantial disclosure document which includes such information on business description, risk factors, financial statement and capitalization. In addition, such disclosure document is subject to SEC review and comments which as every securities lawyer knows, could impact the timing of any offering.  The need to raise capital quickly may deter most startups from considering Regulation A+.

Furthermore, while Tier 1 issuers are not subject to additional filing obligations, Tier 2 filers would be required to file ongoing annual reports, semi-annual reports and current reports with the SEC following the offering. 

Regulation A+ may have value to mature companies that do not grow fast enough to warrant VC interest but still may have appeal to ordinary investors. Also, it may benefit companies that have a significant number of customers and converting such customers to investors could incentivize them to engage in a stronger word-of-mouth marketing.  However, for most startups and nascent tech companies, Regulation A+ is a disappointment. The increased legal, accounting and filing fees and SEC review procedures of Regulation A+ will probably drive startups toward Regulation D – the offering available only to “accredited investors” instead.   

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.