Regulation A+ Crowdfunding

Recent legislation was just passed by the SEC referred to as Regulation A+ as Title IV of the JOBS act. This new legislation will help solve a major issue faced by most crowdfunding platforms. Until now, for platforms to open up an investment to non-accredited investors the investment would need to have passed approval by each state separately subject to their Blue Sky Laws. The process was too lengthy and costly for most of the platforms to pursue which is why these investments remained closed to non-accredited investors. With Reg. A+ the SEC basically pre-empts the rights of the individual state to review the investments and allows the sponsor to open the investment to the public in the form of a mini-ipo. This pre-emption will apply to TEIR II offerings which are for funding up to $50 Million but the investors will be subject to investment limits and the offerings will be subject to greater scrutiny. The TEIR I offerings will be increased to allow fundraising up to $20 Million and a new review system will be tested referred to as coordinated review, which will be a combined effort of the states to reduce the time and effort to gain approval for an offering.

Here are the highlights of the new legislation as outlined from Kiran Lingam, General Counsel at equity crowdfunding platform SeedInvest.

• High Maximum Raise:  Issuers can raise up to $50,000,000 in a 12 month period for Tier II and $20,000,000 for Tier 1.
• Anyone can invest:  Not limited to just “accredited investors” – your friends and family can invest.  Tier 2 investors will, however, be subject to investment limits described below.
• Investment Limits: For Tier II, individual non- accredited investors can invest a maximum of the greater of 10% of their net worth or 10% of their net income in a Reg A+ offering (per offering).  There is no limit for accredited investors in Tier II. There are no investment limits under Tier 1.
• Self-Certification of Income / Net Worth:  Unlike Rule 506(c) under Title II of the JOBS Act, investors will be able to self-certify their income or net worth for purposes of the investment limits so there will be no burdensome documentation required to prove income or net worth.
• You can advertise your offering:  There is no general solicitation restriction so you can freely advertise and talk about your offering, including at demo days, on television, and via social media.
• Offering Circular Approval Required:  The issuer will have to file a disclosure document and audited financials with the SEC.  The SEC must approve the document prior to any sales.   The proposed indicate that the Offering Circular will receive the same level of scrutiny as a Form S-1 in an IPO.    This is the biggest potential drawback of using Reg A+.   
• Audited Financials Required:  For Tier 2, together with the Offering Circular, the issuer will be required to provide two years of audited financial statements.  Tier 1 offerings require only reviewed financials (not audited).
• Testing the Waters:  An issuer can “test the waters” and see if there is interest in the offering prior to spending the time and money to create the Offering Circular.  This would be “Preview” mode on SeedInvest where investors can express interest, but can’t yet invest.  This is important so that companies don’t have to gamble on their fundraise and can see if there is interest prior to investing in legal and accounting fees.
• Ongoing Disclosure Requirements:  For Tier 2, the issuer will be required to make an annual disclosure filing, a semi-annual report, and current reports, each of which are scaled back versions of Form 10-K, Form 10-Q and Form 8-K, respectively.  These reports will also require ongoing audited financials.  These disclosures can be terminated after the first year if the shareholder count drops below 300.  There are no ongoing disclosure requirements for Tier 1.
• State Pre-Emption:  As discussed above, the old Regulation A (now Tier I) was never used because it required registering the securities in every state that you make an offer or sales.  New Reg A+ Tier 2 preempts state law – again – this is huge.  Tier 1 Reg A+ again does not have state pre-emption but will be a testing ground for NASAA Coordinated Review.
• Shareholder Limits:  In a welcome departure from the proposed rules, it appears that the Section 12(g) shareholder limits (2,000 person and 500 non-accredited investor) will not apply to Reg A under certain circumstances.  This fixes a major problem from the proposed rules which would have limited the potential for very small investments (i.e. $100).
• Unrestricted Securities:  The securities issued in Reg A+ will be unrestricted and freely transferable, though many issuers may choose to impose contractual transfer restrictions.
• No Funds:  Investment companies (i.e. private equity funds, venture funds, hedge funds) may not use Reg A to raise capital.
• Integration:  There are several safe harbors so it seems that you can use Reg A+ in combination with other offerings.  There are safe harbors for the following:

No integration with any previously closed offerings

No integration with a subsequent crowdfunding offering

No integration where issuer complies with terms of both offerings independently – can conduct simultaneous Reg D – 506(c) offering.

Bottom line, this is what we have all been waiting for or at least sort of. It remains to be seen how quickly these filing procedures will take and whether they will be quick enough for many of the platforms to make use of. Although timing may be less of a factor when a start-up is looking for funding because their product or offering is usually unique to them, this is not the case when the offering is for real estate. Since the real estate deals are basically subject to competition between sponsors who ever can close the deal and get the financing quicker is usually the winner. The projects don’t stay on the market long enough for a drawn out funding process.

It will be interesting to see how the platforms adapt to the new legislation and whether they begin to offer investments under Reg A+. I am confident there will be a solution and we can look forward to freely investing : )

For a comprehensive update on the new legislation read the full post by Kiran here.