As the JOBS Act proceeds to enable startups and entrepreneurs to raise money, on June 19, 2015, the Securities and Exchange Commission (SEC) gets an A+ for updating its regulations in connection with the JOBS Act and allow smaller companies to more easily raise money from the public through “mini-IPOs” subject to less scrutiny could raise the ceiling on funding for companies and open the door to smaller investors.
The new regulations represent a change to the little-used Regulation A law which allowed companies to raise up to $5 million, but included hurdles, including registering offerings in each state they were sold. Regulation A+, introduced as a part of the 2012 JOBS Act, will enable companies to raise up to $50 million from the general public in any 12-month period, while eliminating some of Regulation A’s difficult registration rules.
Reg A+ allows entrepreneurs to raise a large sum of capital from a large pool of investors. By raising small amounts from many investors, an entrepreneur can spread out ownership of the company more broadly. Oftentimes, institutional investors require a certain level of control alongside their investments which can even result in an entrepreneur getting kicked out of their own company. In a typical Reg A+ offering, a company will not need to cede board seats or agree to other potentially adverse mechanisms that are typical when raising venture capital or private equity.
Regulation A+ also allows those funds to be raised from the general public, not just accredited investors.
Under previous regulations, only accredited investors were allowed to invest. Accredited investors are those individuals who earn more than $200,000 per year, or have a net worth of greater than $1,000,000. Now, anyone can invest, albeit with some limitations as to the amount.
To raise up to $50 million under a Regulation A+ Tier-2 “mini-IPO,” a company must have at least two years of audited financial records. The SEC then has to review the filed documents and grant approval before any company can start to raise capital.
“The real magic here with the A+ law is the elimination of the need for adhering to individual state-to-state compliance of Blue Sky laws,” says Bankroll.com founder Kendall Almerico. “Just imagine having to file in all 50 states and then waiting and waiting for each individual state to approve. That’s how it’s been forever.”
Blue Sky laws are state regulations “designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details.”
The new law, however, also allows businesses to test the waters to gauge public interest in the investment and enter into conversations with potential investors prior to filing.