On April 5, 2012, the JOBS Act was signed into law by President Obama. Under Title IV of this new law, a framework for equity crowdfunding was created. On June 19, 2015, the SEC adopted specific rules which, in effect, implemented the provisions that have since become known as Regulation A+. Issuers may offer and sell securities of up to $20 million in a 12-month period under Tier 1 or up to $50 million in a 12-month period under Tier 2. Most issuers have utilized Tier 2 for their capital raises because, once approved, the offering is exempt from blue sky requirements. Under Tier 1 only accredited investors are allowed to invest in the public offering however, under Tier 2 both non-accredited and accredited investors are allowed to invest. This is groundbreaking because previous to the JOBS Act only accredited investors had the opportunity to invest in early stage companies. In the U.S., an accredited investor is someone with a net worth of at least one million dollars excluding their primary resident or have at least $200,000 of income for each year for the last two years or $300,000 of combined income if married. Non-accredited investors are anyone below these thresholds.


What is entailed?

Companies seeking to undertake a Regulation A+ offering need to consult trusted service professionals from the legal, accounting and marketing fields. Issuers must file an offering statement with the SEC for review prior to raising any capital. Additionally, they will need a PCAOB compliant audit for their financials. Once approved by the SEC, companies can then begin raising funds until their goals have been met. Post-raise there exists on-going reporting obligations that companies face, including semi-annual reports (on Form 1-SA), annual reports (on Form 1-K) and current reports (on Form 1-U). Companies may also seek to enlist a broker-dealer relationship in the process of raising capital.


How long does it take to complete a Reg A+ raise?

The Reg A+ process varies by company since it takes many collective efforts in correctly preparing for an offering (audits, valuations, legal work and sophisticated marketing). The process can take as little as 4-6 months to over a year depending upon the company, their partners and the SEC review process. Issuers are able to do a raise once every 12 months. The process could take longer if an issuer has yet to complete their audits and is not prepared with a proper marketing foundation.


What’s the difference between rewards-based crowdfunding and equity crowdfunding?

Equity crowdfunding is different from rewards-based crowdfunding where people pledge support or money towards a company in exchange for some sort of incentive (e.g., kickstart projects). The difference is that companies are now legally able to issue actual equity or debt in a public offering for their company allowing investors the potential for eventual gains (or total losses). Similar to rewards-based crowdfunding, equity crowdfunding allows companies issuing stock to generally solicit their offering, meaning they can advertise broadly in an effort to attract and convert new shareholders. Many new terms have emerged to describe process but the one that seems to be sticking is to refer to Reg A+ raises as a mini-IPO.


What types of companies have found the best success with Reg A+?

Since 2015, the industry and the adoption of Reg A+ has been slower than anticipated. As an example, by February 2017 just 32 companies had found success with Reg A+ transactions, raising nearly $400 million collectively. Many of the early adopters were startup companies with little experience, revenue or working capital. The most common industry has been real estate; however, a variety of other industries are represented including food/beverage, hospitality, restaurants, franchises and even service providers.


What’s ahead?

The JOBS Act made some of the most dramatic and sweeping changes to the ways that companies can market and sell public offerings of stock. Previously the capital raise process was exclusive to only accredited investors and institutions. Companies are now able to build direct relationships with a new pool of investors and, in many cases, convert their customers into investors building a loyal base. The challenge with this undertaking is very real and should not be overlooked. Initial costs to undergo this type of raise can range mid-six figures to over seven which means that it takes a considerable amount of investment to undergo the process as well as ongoing transparency, reporting, disclosure and compliance.

John Shaw