The US Securities and Exchange Commission (SEC) caused shock waves this week when it announced new rules, under Title IV of the JOBS Act, that affect small public offerings. The announcement means that growth companies will in future be able to raise up to $50 million in capital from unaccredited as well as accredited investors – giving them an alternative to traditional sources of finance such as venture capital.
The new rules, known colloquially as ‘Reg A+', become effective on 25 May. They increase the maximum amount of capital that a business can raise via a Regulation A offering from $5 million to $50 million in a 12-month period. This amount is split into two tiers, the maximum offering size for Tier 1 being $20 million and for Tier 2 $50 million.
Investors will be able to participate in these offerings whether they are accredited or unaccredited, although there will be certain individual investor limits. Under Tier 2, unaccredited investors will only be able to invest whichever is greater of 10% of their annual income or their net worth in an offering. The new regulations allow them to self-certify their income or net worth, instead of having to provide documentary evidence.
For their part, companies are free to advertise their offering – including via social media – as there are no advertising or general solicitation restrictions.
Prior to Reg A+, companies were required to register their offerings in each US state where their securities were sold, creating a significant administrative burden. A ‘coordinated review’ process was introduced by the states via the North American Securities Administrators Association (NASAA) to address this – in part to avoid the SEC pre-empting the whole process.
However, Reg A+ leaves this ‘coordinated review’ process in place for Tier 1 offerings but pre-empts state securities regulation for Tier 2 offerings, meaning only SEC review is required at this level.
To protect investors – especially those who are unaccredited – companies seeking to raise capital under both tiers of Reg A+ are required to file an offering circular that must be approved by the SEC prior to the sale of shares. Indications are that this offering circular will be scrutinised by the SEC to the same degree as it would for a standard IPO, requiring the same amount of effort by the company in preparing it.
In addition, accountant-reviewed financials are required under Tier 1 and audited financials under Tier 2.
While still requiring a good deal of effort from them, this week’s changes by the SEC mean that growth companies in the US now have much greater opportunity to raise capital from the general public. For their part, ‘the crowd’ will in future be able to participate in offerings for the next Uber or AirBnB rather than merely standing on the sidelines, watching while business angels and venture capitalists have all the fun.