Is Title III Crowdfunding Already Obsolete? Regulation A+ = Supercharged Crowdfunding

By: Jim Verdonik

Jim Verdonik

Founder of Innovate Capital Law

http://InnovateCapitalLaw.com/

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JimV@InnovateCapitalLaw.com

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We have been waiting so long for the SEC to approve Crowdfunding rules as directed by Title III of the JOBS Act that the Title III Crowdfunding rules will be obsolete the time the new rules are issued.

Both technology and other legal pathways to raising capital are quickly making the issuance of Title III Crowdfunding rules a non-event. 

Regulation A+, the most recent addition to the capital raising tool kit, was approved by the SEC on March 25, 2015 in SEC Release No. 33-9741. 

In the olden days (before 2013), if you wanted to raise capital you had two basic choices:

• Do it privately without conducting a "general solicitation."
• Register your offering with the Securities and Exchange Commission (and perhaps with the states).

In theory, you could have conducted a general solicitation under Regulation A as well, but the old Regulation A exemption wasn't used very often, because:

• The amount of money you could raise using the old Regulation A was limited compared to the time and expense of the offering. 
• The old Regulation A didn't pre-empt state securities registration laws.

New Regulation A+ is a much more attractive capital raising pathway than the old Regulation A.

Let's avoid one mistake when we judge how many issuers are likely to do Regulation A+ offerings.  Regulation A+ has very little connection with the old Regulation A.  Regulation A+ is designed to work with modern technology platforms. 

Supercharged and Supersized Crowdfunding

Instead of calling it Regulation A+, it should really be called Supercharged Crowdfunding or Supersized Crowdfunding.  That's because Regulation A+ eliminates most of the detriments that are built into the proposed Title III Crowdfunding Rules.  Regulation A+ is a mixture of both:

• Title III Crowdfunding and
• A traditional registered public offering.

Let's compare key provisions of new Regulation A+ to the proposed Title III Crowdfunding rules:

• What are the maximum offering amounts in Regulation A+ offering comparted to Title III Crowdfunding offerings?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
$1 million during any 12-month period	$20 million during any 12 month period	$50 million during any 12-month period

• Are re-sales by current shareholders permitted in the offering?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
No	Yes, up to$6 million during any 12-month period	Yes, up to 30% of the securities sold in the offering, but not exceeding $15 million during any 12-month period.

• Can non- accredited investors purchase securities in the offering?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes	Yes	Yes

• Are there maximum limits on how much individuals can invest?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes.  There is a sliding scale maximum that starts at $2,000 and increases to $100,000 per investor during any 12-month period in all Title III offerings during that 12-month period.  The actual amount an investor can invest within that range is equal to (i) 5% of the greater of annual income or net worth, if both annual income and net worth are less than $100,000 or (ii) 10% of the greater of annual income or new worth if either annual income or net worth is equal to or greater than $100,000.  Investments made in other Title III Offerings during the preceding 12-months are deducted from the amount the investor can invest in a later offering.	There is no $$$ limit for any investor.	There is no $$$ limit for accredited investors. Non-accredited investors cannot invest  more than 10% of (i) if the investor is a natural person, the greater of annual income or net worth or (ii) if the investor is not a natural person, 10% of most recent year revenue or net assets.

Can you accept the investor's representation that they are not exceeding the maximum limits?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
The issuer can rely on the platform operator to ascertain the maximum any investor can invest in the offering.	Since there are no limits, representations by investors are unnecessary.	Yes.  Issuers can rely on investor representations unless the issuer knows the presentations are not true.

• Are the securities sold in the offering "restricted securities" which limit the investor's ability to re-sell shares after they purchase the shares?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes.  There is a one-year resale prohibition, except to persons who are accredited investors and other exceptions.	No.  The securities sold in Tier 1 Regulation A+ offerings are not "restricted securities."  Unless the buyer is an affiliate of the issuer, the buyer can re-sell immediately without registration or complying with Rule 144.	No.  The securities sold in Tier 1 Regulation A+ offerings are not "restricted securities."  Unless the buyer is an affiliate of the issuer, the buyer can re-sell immediately without registration or complying with Rule 144.

• Can you use a technology platform to sell the offering?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes.  But you can use only one platform at a time.	Yes.  You can use one or more platforms at a time.	Yes.  You can use one or more platforms at a time

• Can you sell securities outside a technology platform using the mails or the issuers website or other means?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
No, all sales must be though the technology platform?	Yes	Yes

• Are you free to promote the offering outside the technology platform?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Off-platform sales activities are limited to referring investors to the technology platform where investors can find your offering information.	Off-platform sales efforts are only restricted by anti-fraud rules, but persons employed in the sales effort must be careful about their activities and compensation arrangements to avoid being required to register as a broker-dealer.	Off-platform sales efforts are only restricted by anti-fraud rules, but persons employed in the sales effort must be careful about their activities and compensation arrangements to avoid being required to register as a broker-dealer.

• Do you have to use a registered-broker-dealer or underwriter or pay a sales commission?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Platform operators can be registered-broker-dealers or a person whose only registration permits operating a Title III Crowdfunding. If a platform operator is not a registered broker-dealer, they cannot charge a sales commission, which means their compensation must be the same whether or not you raise capital.	You are not required to hire a registered broker-dealer or underwriter, if you want to sell the offering yourself.  If the platform operator is a registered broker-dealer, you can pay a sales commission and can make recommendations to buy securities. You can use non-registered platform operators, but their activities and fees must be limited to avoid being required to register.  Some unregistered platform operators may only provide only listing services and not make recommendations to avoid being required to register as a broker –dealer.	You are not required to hire a registered broker-dealer or underwriter, if you want to sell the offering yourself.  If the platform operator is a registered broker-dealer, you can pay a sales commission and can make recommendations to buy securities. You can use non-registered platform operators, but their activities and fees must be limited to avoid being required to register.  Some unregistered platform operators may only provide only listing services and not make recommendations to avoid being required to register as a broker –dealer.

• Can platform operators take a carried interest or management fee as compensation?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
No.  Platform operators cannot have equity interests in issuers using their platform.	Some platform operators may have revenue models other than sales commissions and may provide only listing services to avoid being required to register as a broker –dealer. Platform operators who are registered investment advisers may operate using a different compensation model.  They or an affiliate may form an investment entity and  be compensated with a carried interest and a small annual management fee.	You are not required to hire a registered broker-dealer or underwriter, if you want to sell the offering yourself. You can use non-registered platform operators, but their activities and fees must be limited to avoid being required to register. If the platform operator is a registered broker-dealer, you can pay a sales commission and can make recommendations to buy securities. Some platform operators may have revenue models other than sales commissions and may provide only listing services to avoid being required to register as a broker –dealer.

• Do platform operators have freedom to determine how their platform sells securities?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
No.  The proposed rules require equal treatment for all offerings and limit how the platform operator presents offerings.  Offerings can be organized and presented to investors only in broad generic categories (like geographic location and industry), but platform operators cannot make recommendations.  The SEC has indicated in its proposing release that if the platform operator organizes offerings into non-generic categories (such issuers that have profits or revenue or assets) that might imply a recommendation to buy the securities.	There are no rules for how platform operators operate, except that operators who are not registered broker-dealers must avoid doing things that only registered broker-dealers are allowed to do. State laws may require registration of the platform operator or other sales team members in the states.	There are no rules for how platform operators operate, except that operators who are not registered broker-dealers must avoid doing things that only registered broker-dealers are allowed to do. State laws may require registration of the platform operator or other sales team members in the states.

• Does the issuer have to file post-closing periodic reports with the SEC?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Requires annual reports for as long as the securities sold in the offering remain outstanding.  These reports are less extensive than for Tier 2 Regulation A+ issuers or for 1934 Exchange Act reporting companies.	No post-closing periodic reports are required for Tier 1 Regulation A+ issuers, except to report sales in the offering, unless the number of shareholders the issuer has triggers Section 12 (g) registration. States may also require reports of sales in the offering.	Requires both a report of sales in the offering and ongoing semi-annual reporting and some special events reporting that is less extensive than a full 1934 Exchange Act reporting company, but is more extensive than for Title III crowdfunding. If the issuer meets the definition of a smaller reporting company files the annual and semi-annual reports and hires a registered transfer agent, the issuer is exempt from full 1934 Exchange Act reporting requirements even if the number of shareholders the issuer has triggers Section 12 (g) registration. States may also require reports of sales in the offering.

• Does the SEC review and approve disclosures before you can offer and sell securities?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
No.  There is no SEC approval process, but you must file a disclosure document with the SEC before the offering begins and you cannot sell for securities for at least 21 after the offering begins.	Yes.  Issuers must file a disclosure document with the SEC before the issuer makes offers and must obtain SEC approval of the disclosure document before any sale occurs.	Yes.  Issuers must file a disclosure document with the SEC before the issuer makes offers and must obtain SEC approval of the disclosure document before any sale occurs.

• Are states pre-empted from requiring state registration of the securities?

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes.  State registration is pre-empted.  But state anti-fraud rules apply.	No.  There is no state pre-emption for offers or sales of securities.	Yes.  State registration is pre-empted.  But states can require a report that you sold securities and state anti-fraud rules apply.

• Are audited Financial Statements required? 

Proposed Title III Crowdfunding	Tier 1 Regulation A+	Tier 2 Regulation A+
Yes.  Audited financial statements are required, if the issuer sells more than $500,000 of securities.  Reviewed financial statements are required for sales between $100,000 and $500,000.	No, but state registrations may require audited financial statements.	Yes.  Audited financial statements are required.

As the tables above show, Regulation A+ is much more flexible than proposed Title III crowdfunding rules, because Regulation A+:

• Does not dictate where or how you sell securities, except for general broker-dealer rules.
• Permits you to raise much more money than Title III crowdfunding.
• Facilitates re-sales by shareholders.

Other articles about important Regulation A+ issues include the following:

Summary of Key Provisions of New Regulation A+	http://jimverdonikintersection.blogspot.com/2015/05/summary-of-key-provisions-of-new.html
Your Goals Will Determine Whether Regulation A+ Is Right for Your Business	http://jimverdonikintersection.blogspot.com/2015/05/your-goals-will-determine-whether.html
Which Should You Choose: Tier 1 or Tier 2 of Regulation A+?	http://jimverdonikintersection.blogspot.com/2015/05/which-should-you-choose-tier-1-or-tier.html
Why Choose?  Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?	http://jimverdonikintersection.blogspot.com/2015/05/why-choose-why-not-do-both-rule-506.html
Microcap Financings: Regulation A+ Offerings Join Public Shell Company Mergers and Self-Registrations to Create Small Public Companies	http://jimverdonikintersection.blogspot.com/2015/05/microcap-financings-regulation.html
State Securities Law Issues in Regulation A+ Offerings	http://jimverdonikintersection.blogspot.com/2015/05/state-securities-law-issues-in.html