Regulation A+, one of the most overlooked provisions of the JOBS Act, promises to be the best new way for private companies to raise money without the headaches of going public or the restrictions of private offerings. As part of the JOBS Act, the SEC was tasked with creating a new offering exemption that has been dubbed “Regulation A+” due to its improvement upon the current Regulation A exemption. The upgrades should take little-used Regulation A and transform it into the primary way for private companies to raise capital in the U.S. In fact, I believe that Regulation A+ will end up having the opposite effect of the stated intent of the JOBS Act, which is to have more companies go public. In contrast, Regulation A+ will allow smaller and mid-cap public companies to more easily raise capital without having to going public. As noted in the recent GAO review of current Regulation A, investment banks that had stayed away from Regulation A offerings in the past because of the small offering maximum will now be attracted to the new exemption.
In the past, Regulation A has suffered from some serious limitations. Particularly, the exemption only allows for $5 million to be raised in any 12-month period. This amount is too small for many companies, given the offering costs. In addition, the securities in Regulation A offerings do not qualify as “covered securities” under the National Securities Markets Improvement Act of 1996, which would have exempted them from state securities laws. Thus, a Regulation A offering still has to comply with time consuming and expensive state “Blue Sky” law requirements. Regulation A also requires SEC review of an issuer’s offering materials (generally, a scaled-down version of a full registration statement). This offering statement, which includes a notification and a fairly extensive offering circular and exhibits, still requires a substantial outlay, despite being less expensive than a full registration statement.
So companies ultimately turn to other exemptions to raise capital. The main exemption used is SEC Rule 506, which allows an unlimited amount to be raised, but places limits on solicitation, sales to non-accredited investors and resale (elimination of these solicitation limits are subject to current proposed rules). With the creation of new Regulation A+, however, we should see the SEC throwing out the bad, and keeping the good, parts of Regulation A. As a result, I believe Regulation A+ will overtake Rule 506 Continue Reading Regulation A+: Raise the capital you need without the hassle or expense