New Regulation A+ Rules Expand Inexpensive Capital Formation of Up to $50 Million
Many in the investment and crowdfunding community had eagerly been waiting for the Securities and Exchange Commission (SEC) to release rules to enact the provisions of Title IV of the JOBS Act. The SEC finally released its regulations in March of this year. The new rules contained a partial preemption of state securities laws which surprised many. Title IV told the SEC to liberalize the provisions of Regulation A which is an exemption to allow smaller companies to sell private securities up to an amount of $5 million. It represents a huge step forward for crowdfunding.
The JOBS Act.
The JOBS Act was passed by Congress in 2012. Although many were excited about the prospects of Title IV of the legislation, it was unclear when and how the SEC would regulate the private offerings. There was particular concern that the main deficiency in Regulation A private offerings would remain a big stumbling block to wider use of the provisions. The main issue that limited the use of Regulation A was the requirement that companies register in all states where securities would be sold. This severely limited the practicality of using Regulation A+ in addition to the limitation on raising only $5 million.
Tier 2 Exemption.
The SEC specifically exempted Tier 2 offerings from the provisions of state securities laws. Under a Tier 2 offering, companies can raise up to $50 million in securities during a 12 month period. Companies must provide audited financial statements, as well as make periodic disclosures to investors to participate in a Tier 2 offering. These additional disclosures are not required for a Tier 1 offering.
Due to the heightened disclosures, the SEC adopted an extremely broad definition of qualified purchaser. Basically, everyone is a qualified purchaser for a Tier 2 offering. This has the effect of preempting state securities laws. Still, states can use a coordinated review process to look over filings. The SEC is giving states the chance to participate in this coordinated review without totally preempting them yet. Apparently, this was a point of contention among the SEC Commissioners.
The SEC reached a compromise giving the states the chance to prove that a coordinated review was workable and employed an efficient process. The SEC allowed the North American Securities Administrators Association a place on the committee to enforce Reg A+. States still retained the jurisdiction over securities cases and anti-fraud enforcement.
Opposition to Preemption.
Not all states are on board with the broad definition. Montana and Massachusetts have filed suit against the SEC questioning its authority to preempt state law. A number of commentators have noted that Massachusetts’ opposition is ironic. In 1980, a Massachusetts regulator ruled that an offering by Apple was too risky and prohibited investors from participating in its IPO. From a legal perspective, It seems unlikely that the states will be able to overrule an unanimous decision of the SEC.
Tier 1 and Tier 2 offerings still have a number of requirements to fulfill before they sell their securities. Still, the new regulations are a seismic shift in how private companies can obtain access to capital. The United States is one of the most entrepreneurial countries in the world. Regulation A+, if properly implemented, has the ability to revolutionize crowdfunding. It will allow young and promising companies the chance to grow.
Nate Nead is a Investment Banker at DealCapital.com. There he assists in capital formation, mergers, acquisitions and divestitures for middle-market businesses. He resides in Seattle, Washington with his wife and two children.