Testing the Waters with a Mini-IPO

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Private companies looking for investment capital need a large audience.  On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation called The Jumpstart Our Business Startup Act (“JOBS Act”) into law.  The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to publicly advertise their capital raises.  Initially, private companies could only crowdfund from accredited investors: the wealthiest two percent (2%) of Americans.  However, when Title IV (Regulation A+) of the JOBS Act went into effect on June 19, 2015, private, growth-stage companies were, for the first time, permitted to raise money from all Americans.  This expansion is commonly known as Regulation A+ (“Reg A+”).

Like an initial public offering (“IPO”), Reg A+ allows companies to offer shares to the general public.  Companies looking to raise capital via Reg A+ will first need to file with the Securities and Exchange Commission (“SEC”) and get approval before initiating marketing.  Reg A+ does have a filing requirement, and some reporting requirements though these are far less burdensome than non-exempt registration and an IPO.  Additionally, fees associated with a Reg A+ offering are much lower than an IPO effectively making a Reg A+ offering a “mini-IPO.”

Reg A+ is broken down into two (2) broad sections: Tier I and Tier II.  Both Tiers allow companies from the United States and Canada to utilize this exemption to sell their interests to accredited and non-accredited investors alike.  Tier I offerings allow a company to raise up to Twenty Million Dollars ($20,000,000) within a twelve (12) month period.  Tier I offerings must qualify at a state level, i.e. be in compliance with what are known as state “blue-sky” laws.  The company must provide financial statements for the two (2) most recent fiscal years (which may be unaudited if allowed by state blue-sky laws), and do not require ongoing SEC reporting.  Non-accredited investors are allowed to invest without limitation.

Tier II, on the other hand, allows up to a Fifty Million Dollar ($50,000,000) offering in a twelve (12) month period.  Tier II offerings must provide audited financials (which can be time consuming) and some ongoing reporting, although those requirements are far less arduous than an IPO.  Non-accredited investors may participate in a Tier II offering; however, they are limited to investing the lesser of ten percent (10%) of their income or net worth per year.

One of the biggest advantages of a Tier II offering, relative to Tier I, is the ability to preempt state blue-sky laws.  This allows a company to seek national investments without the time consuming and expensive need to qualify in all fifty states and four territories of the US.  As a result, a large majority of Reg A+ offerings have been filed under Tier II.

Reg A+ also allows companies to “test the waters” before they begin to accept investment through the offering.  This means investors can indicate their interest in investing in a company and how much they would be willing to invest before the company actually accepts that investment and goes through with the official Reg A+ offering and attendant paperwork and expense.  It is important to note that companies testing the waters can use solicitation materials both before and after the offering statement is filed with the SEC.

In order to qualify, companies must file a Form 1-A with the SEC to launch the Reg A+ offering.  This form includes everything from a description of the business and its executive officers, financial statements, risk factors, a projected use of proceeds, the securities being offered, and more.  It can be expensive and that is why testing the waters is such a great tool for any company looking to raise more than Four Million Dollars ($4,000,000).

If a company opts for a Tier II raise and is successful, it is required to adhere to three (3) reporting requirements; annual reports, semi-annual reports, and event reports.  If the business has fewer than three hundred (300) shareholders of record, they may file to withdraw from these reporting requirements after the first annual report.  However, if the company exceeds certain asset and number-of-shareholders benchmarks and has either a public “float” of more than Seventy-Five Million Dollars ($75,000,000) (held by non-affiliates) or annual revenue greater than Fifty-Million Dollars ($50,000,000), the company will enter a two-year transition period to begin complying with the reporting requirements of fully public companies.

Another advantage to Reg A+ is that the securities do not have trading restrictions, meaning they are transferrable immediately, that is, without the six (6) month lock-up period associated with other unregistered securities.  Since investors can sell their shares almost immediately, Reg A+ can be seen as a liquidity even, making the overall investment less risky.

If your company needs to raise less than Four Million Dollars ($4,000,000), then Reg A+ is not cost-effective, compared to other methods like Title II Equity Crowdfunding.  For larger capital raises, Reg A+ comes into its own and can be the most cost-effective method for raising sizable amounts of capital because of the ability for companies to test the waters, market to all investors through all marketing channels and methods, and successfully complete a mini-IPO.

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