By: Jeremy P Feakins
The Securities and Exchange Commission just adopted the new Regulation A+ rules, providing a more straightforward opportunity for small and medium-sized private companies to access capital
On December 19, 2018, the Securities and Exchange Commission (SEC) adopted the final rules for Regulation A+ (Reg A+), an alternative to a traditional Initial Public Offering (IPO). These new rules should make it easier for smaller, early-stage companies to access capital.
In 2012 Congress passed the Jumpstart Our Business (JOBS) Act, a law intended to support small-business growth and employment by lowering regulatory barriers for companies trying to list their company on a public stock exchange and allowing firms to have more private shareholders.
Included in the JOBS Act were a number of very good initiatives aimed at making capital raising much easier for smaller companies. One of these initiatives included increasing the amount of funds a company could raise in any one year through Regulation A. Unfortunately, although the limit increased from $5.0million to $50.0million, companies that are publicly listed were excluded. Now, thanks to the SEC and many different organizations who lobbied for changes in the rules, public companies are now included.
Through Reg A+, a U.S. or Canadian company is afforded the opportunity to:
- Raise up to $50 million in a 12-month period using a “public solicitation” of its shares and have the offering be exempt from SEC and state securities law registration.
- Confidentially submit its offering memorandum to the SEC and enjoy the opportunity to “test the waters” before pursuing a mini-IPO.
- Enjoy a streamlined, expedited review process where the company is required to make its offering memorandum public just 21 days before SEC qualification and the beginning of its roadshow.
- Combine public funding (through Reg A+) with private funds from venture capitalists to create a larger round of fundraising.
Full details of the new rules are still awaited, but they will become effective immediately upon publication in the Federal Register, which usually happens in about 60 days.
A company looking to pursue a Reg A+ filing will need to:
- Assemble a team of professionals for IPO preparation. At a minimum, that team will include: company counsel, independent auditors and consulting accountants, underwriters, underwriters’ counsel, transfer agent, and other advisors and service providers for certain aspects of the IPO process.
- Submit an offering memorandum to the SEC for approval for distribution to offering participants. Non-accredited investors may participate in a Reg A+ offering.
- Raise a sufficient amount and take other actions that allow the company to meet all listing requirements. In many cases, companies will qualify for listing even if the amount raised is less than the $50 million maximum offering size permitted under Reg A+.
- Comply with the rules applicable to public companies, including filing annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC.
The benefit to small and emerging companies in utilizing Reg A+ for fundraising purposes is that the new rules offer a more simplified offering circular and less stringent SEC review procedure.
Smaller companies struggle to find the money they need to grow. I’m confident these new rules will provide a capital raising resource that allows young companies to access capital markets more efficiently.