The JOBS Act of 2012 created and revised various methods for small and emerging companies to raise capital. Regulation A (Reg A), just one of several exemptions companies can take from registering their securities with the SEC, was completely overhauled. The updated Reg A, sometimes called “Reg A+,” was split into two tiers and allowed for significantly higher raises (up to $20 million with Tier 1 and up to $50 million with Tier 2) and more flexibility around how and to whom securities can be marketed.
Reg A falls into a middle ground between private capital raise options like Regulation D, and public options like an IPO, but presents its own unique benefits to issuers.
Regulation A vs Regulation D 506 b & 506 c
Two major benefits to Reg D over Reg A are the ability to raise capital without a maximum limitation and the eligibility of SEC-registered companies to participate in the exemption. Reg A is limited to U.S. and Canadian companies that have not previously registered with the SEC. Although, that may be changing soon.
But the primary difference between Regulation A and private offerings under Regulation D is the eligibility of non-accredited investors. While 506 b does allow for up to 35 non-accredited investors in an offering, it is forbidden to market those securities online to potential investors. 506 c, does not allow unaccredited investors, but can be marketed online via the “general solicitation” rule, bringing it more in line with Reg A. Regulation A is marketable to all investors, regardless of channel.
Regulation A vs Crowdfunding (Regulation CF)
It is a common misconception that because Reg A is marketable to any and all investors, it is crowdfunding. However, there are some significant differences between Reg A and true crowdfunding under Regulation CF. Because of the lower capital raise limit, companies utilizing Reg CF tend to have lower valuations and be in earlier developmental phases. Reg A is for more established companies looking to use the capital for growth. Regulation CF also requires that the offering be listed on a registered funding portal. Acceptance into these portals can be highly competitive, with some accepting as few as 1% of applicants. No such requirements exist for Reg A offerings, though some portals do exist to help with listing and subscription, as does the option to list on national stock exchanges such as OTC, NASDAQ, and NYSE.
Regulation A vs IPO
Though Reg A is an exemption from federal registration requirements like private capital raise exemptions Regulation D and CF, Reg A actually has more in common with a traditional IPO. Because it is open to all investors and because in some cases securities can even be resold or traded, Reg A offerings are considered public offerings.
A traditional IPO is designed for large companies with the capital needed to cover the legal and accounting costs associated with going public. Reg A opens up the door for smaller companies to do the same, including the ability to list Tier 2 offerings on securities exchanges like NASDAQ or NYSE or even OTC. For this reason, a Tier 2 offering is sometimes called a “Mini-IPO.”
Similar to an IPO, a Reg A offering can act as a liquidity event for earlier stage investors. This “secondary sales” process allows for up to 30 percent of the securities sold during a raise to come from current security holders.
Unique aspects of a Reg A deal:
- No required minimum capital raise goal (unless listing on NASDAQ or NYSE)
- Shorter document preparation time
- Lower legal and filing fees
- Total issuer process can take up to 20 weeks
Listing on Stock Exchanges
Not all Reg A issuers list their offerings on exchanges, but for those that have sufficient resources to accommodate the extra costs and administrative burden, it can serve as an effective means to gain more market exposure.
Generally, Reg A offerings advance through the “regulatory pipeline” faster than standard IPOs. The SEC has estimated that Reg A deals historically take an average of 78 days to be approved.
This is an advantage as traditional IPOs may take 90 to 180 days to be approved and can carry significant costs. Listing with Reg A can result in a shortened timeline for Reg A offerings, as well as lower upfront costs and legal fees. However that is not to say that listing through Reg A is inexpensive. To be listed on stock exchanges, additional SEC reporting requirements, such as registering as an Exchange Act reporting company, must be complied with, which may result in increased costs.
Many small or emerging businesses involved in Reg A offerings have successfully raised funds without listing on any major stock exchanges, keeping costs low. But, the lack of a trading market will likely increase the difficulty for current shareholders of these companies to sell their shares in the future. Listing on an exchange may help attract investors that are looking for a more liquid investment than is offered by non-traded securities.