Big news out of the crowdfunding sector, as the SEC released rule changes to Title IV of the JOBS Act regarding businesses raising capital through Regulation A offerings. The new rules are being touted as the Reg A+ Bombshell. The $50M Equity Crowding Funding option. The Securities Act of 1933 requires businesses selling or offering securities to be registered with the SEC. Regulation A offerings are an exemption from certain requirements mandated by the Securities Act for offerings less than $5 million in a 12-month period. Through this method, smaller companies are able to minimize the bureaucratic process of filing their public offerings. Though the intentions were to minimize the bureaucratic process, there was still a mandate that forced companies raising capital through Reg A offerings to go though separate state review processes. So, if a company were to offer shares to investors in 20 different states, they would be subject to 21 reviews of distinct securities laws. This processes has deterred businesses from using Reg A offerings, as there are typically only about a dozen Reg A deals a year.
The big uproar in these rule changes has placed a spotlight on pre-emption: federal law superseding state law. Investors like the idea of going through a more deliberate SEC validation because there is an increased due diligence process for their investment. This protects investor’s interest, while the business community believes that the Internet has blurred state lines, and the process is antiquated. Thus, states have adopted a more coordinated review process to expedite the review process while still protecting the investor. The recent rulings have also split the due diligence process into two tiers. Tier I includes companies raising $20 – $50 million in a 12 month period and keeps pre-emption intact. Tier II, companies raising between $5 – $20 million in a 12 month period, will go through the new state coordinated review process.
Companies raising capital through Reg A will also be able to file with the SEC several weeks in advance, allowing for state regulators to review the documents well in advance.
One of the more anticipated rule changes to be used in Reg A offerings is the acceptance of companies raising capital via unaccredited investors. Unaccredited investors, also called mom-and-pop investors, are your everyday average individuals who have the financial capacity to invest companies; normally through online equity crowdfunding portals like Seed Equity Ventures. This will give growth companies another option for raising capital and increase the significance of equity crowdfunding websites. SEC Chair, Mary Jo White said, “These new rules provide an effective, workable path to raising capital that also provides strong investor protections.”
In effect, we should see more companies turning towards using Regulation A offerings to raise capital. Crowdfunding websites have been trying to expand initial investment opportunities from the thousands of venture capitalists to the billions of individuals with Internet access. The new regulation changes will not only streamline the bureaucracy of public offerings, but it will also give startup companies greater access towards the capital they need to grow.