Raising private capital is an activity that many entrepreneurs and companies contemplate at least once as they grow their business. I In the United States, raising capital is a highly regulated activity. Generally, a company needs to register its securities in order to raise capital. However, not every company is ready to register as a public company and go the IPO route. There are a number of exemptions that companies can leverage to avoid registering their securities, such as Regulation D, Regulation A, or Regulation S. Reg D capital raises have dominated and will continue to dominate. Reg S is only utilized for offshore offerings to non-US Persons. Reg A, as it was originally adopted, was impractical. But…there’s a new Reg A in town.
About Regulation A
Regulation A used to be time consuming and costly with a fundraising limit of $5 million. It was so restrictive that it was rarely used. Thankfully, that changed when Title IV of the Jumpstart Our Business Startups, or JOBS Act, amended it in June 2015. Regulation A+, as the amended regulation is now known, offers a much more straightforward qualification process, and can be used by private companies to raise up to $50 million from investors. In addition, Tier 2 Reg A+ capital raises preempt state securities laws, so it makes they much more efficient and practical to execute.
Reg A+ Process and Timeline
A more straightforward or streamlined process does not necessarily equal fast. Expect the qualification and preparation work to take between three to four months.
* Testing the waters: You can ‘test the waters’ by going out and finding out whether your user base, or investment audience, will be interested. Doing this does not require SEC approval and could give you a good indication whether you’d like to proceed with a Reg A+ offering.
* Filing offering documents: After you’ve tested the waters you need to complete and file with the SEC the Form 1-A, which includes a copy of the ‘offering circular’ you would actually present to potential investors. The ‘offering circular’ is a lighter version of the prospectus which would be part of a full-fledged IPO.
* Comment period: Once you’ve filed your offering documents with the SEC, expect to wait about a month before they return the first comments to you. There will likely be some back and forth as you both address and resolve issues, and depending on the complexity of issues in your filing, this could take another couple of weeks or months.
Once you have made the decision to proceed with an offering under Reg A+, you cannot begin selling the securities or raising any capital without providing access to your SEC-qualified offering circular.
Reg A+: Two Tiers
Depending on the size of your company, your offering, and your objectives, there are two tiers under which you could raise capital with Reg A+. Tier I has no ongoing reporting requirements, permits companies to raise up to $20 million, but offerings require state-level review in addition to SEC. Under Tier II, reporting is required twice per year, the fundraising limit is $50 million, and there is no state review required. In general, Tier I offerings will be extremely difficult to accomplish, so most of the market trends toward Tier II offerings.
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