by David Drake
The news on March 25, 2015 that the Securities and Exchange Commission (SEC) had approved the changes to Regulation A has generated lots of debate and discussion.
The new rules on Reg A+ will take effect this June 19. The rules are expected to create a new category of quasi-IPO which will enable companies to raise money from the public at less expense (initial and ongoing) compared to a regular IPO. There are however some important points to keep in mind.
The old Reg A had such low limits for fundraising as well as high compliance costs that it was rarely used. The limit was only $5 million, and companies had to file offerings in every state in which they were selling the securities. The new Reg A+ creates two categories namely, $20 million for the existing Tier 1 and a new Tier 2 category of up to $50 million, of which $15 million can be offered to existing shareholders. Tier 2 offerings will not require company review by every state, and this will considerably reduce the cost of compliance.
The opportunities created by the new regulations are not going to work for every company. It will prove to be appropriate solutions only for certain companies looking for an intermediate step between venture capital and going public. This may not be the best funding option for start-up companies in their early stages. Regulation A+ imposes certain filing, reporting, and preparation requirements though nowhere near as stringent as real IPOs. These requirements are definitely well beyond the information that potential venture capital or angel investors would require. For many start-up companies, this can be too expensive or time consuming to be realistically undertaken.
Clearly these offerings are going to take their toll both in terms of time and money. Though the disclosure requirements are not as stringent as requirements for IPO, they are still quite significant. It is expected that the time taken for SEC review from start to finish could well run into several months. The costs of preparing and submitting audited financial statements for small and medium enterprises could well be in the range of $5,000 to $75,000 and legal fees will have to be incurred on top of the other costs. It would be fair to estimate the total cost of a Reg A+ offering will come to high five figures or low six figures though this will still be modest compared to IPOs costs which could well be in excess of $1 million according to data from PwC.
Scott Andersen of finLawyer and ConsultDA says, “It is still expensive to invest using Regulation A+ in comparison to a Reg D offering. Keep in mind only a handful of lawyers in North America during the last five years have actually prepared an offering using Reg A, and now with its broader scope and possibilities as Reg A+, attorneys are estimating total costs for conducting an offering, including obtaining an audit and making periodic disclosures, will be in the $75,000 range.”
Clearly there are benefits from Reg A+ offerings which could make it a preferable option for some companies. The company can publicly advertise their offerings and raise money from both accredited and non-accredited investors. The securities are unrestricted meaning that they can be resold. Many companies can take the opportunity to create liquidity through small secondary markets created on alternative platforms. This will also give them an opportunity to gauge the appeal to large institutional investors. These benefits mean that it will be worth the time and cost for some companies to put together these offerings.
Overall, there continues to be significant debate with one school of thought holding that the $50 million maximum combined with the regulatory and compliance costs will favour other alternatives for fundraising. Another school of thought believes that these may well offer potential long-term solutions at least for some businesses. Only time will tell, so keep your eyes on these new regulations.
This post originally appeared in InvestorIntel on June 6, 2015 with this link: http://investorintel.com/market-analysis-intel/start-ups-can-now-raise-up-to-50m-capital-using-reg-a-but-how-expensive-is-compliance-to-this-new-sec-ruling/#sthash.9dwREAgP.dpuf
David Drake is an early-stage equity expert and the founder and chairman of New York-based Victoria Global with divisions LDJ Capital, a family office and private equity advisory firm, and The Soho Loft Media Group, a global financial media company involved in Corporate Communications, Publications and Conferences. You can reach him directly at David@LDJCapital.com.