It Will Be A Game Changer
While everyone has been waiting for the SEC to open the doors to equity crowdfunding under the JOBS Act, few paid attention to another section of the JOBS Act called Regulation A+. The SEC paid attention to this exciting provision, and recently passed rules making Regulation A+ a legal means for small businesses to raise up to $50 million in capital online from the general public. This form of equity crowdfunding is revolutionary, and will let entrepreneurial companies raise funds from accredited investors and the general public in a “Mini IPO.”
In the past, most small businesses could only raise capital from wealthy “accredited” investors, until they reached a stage where they could “go public” with an IPO. Only at that point could a company raise funds from the general public. But a full-blown IPO costs hundreds of thousands of dollars to roll out, so very few companies reached that stage. Getting funding from the general public was virtually impossible for small businesses until Regulation A+ became a reality.
While Regulation A+ opens huge new doors for companies seeking capital, it is not going to be inexpensive. There will be compliance, accounting and legal pitfalls to avoid. Kendall Almerico, one of the top Regulation A+ attorneys in the country, warns that while Regulation A+ could be the perfect solution for a business needing funds, it is not something a business should tackle on its own.
“Other lawyers are not always happy with me when I tell people they can do something without a hiring a lawyer,“ Almerico says. “But this is not one of those situations. A company will need a knowledgeable lawyer and a good CPA in order to raise capital with Regulation A+.”
Regulation A+ has two “tiers” under which a business can raise capital. Under Tier 1, a company can raise up to $20 million and there is no requirement of audited financial statements, no limit on amounts to be raised from non-accredited investors and no ongoing reporting to the SEC. But under Tier 1, you have to comply with the “blue sky” laws of every state where you want to raise money. “This can be extremely expensive and time consuming,“ Almerico says. “Tier 1 makes sense for a company that only needs to raise money in a contained geographic area so it only has to comply with one or two state securities laws.”
Tier 2 of Regulation A+ allows a company to raise up to $50 million with no state blue sky-law compliance. But, the SEC requires any company attempting a Tier 2 offering to audit two years of financial statements, which can be costly. Tier 2 also limits the amount a non-accredited investor can invest in each offering, and imposes some ongoing reporting requirements to the SEC.
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