Tuesday, May 12, 2015

Why Choose? Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?


 By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at JFV@WardandSmith.com or you can check out


or my eLearning course at  http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

 
The SEC approved new Regulation A+, which the SEC approved New Regulation A+ on March 25, 2015 in SEC Release No.33-9741.

More than 1,000 Rule 506 offerings occurred each year for each offering that used the old Regulation A.

For several decades, SEC Rule 506 has been the most common way for small to mid-sized companies to raise capital.  In 2013 the SEC permitted businesses to make a general solicitation in offerings that comply with Rule 506 (c). 

So, the big question is:  Why should you do a Regulation A+ offering instead of a Rule 506 offering?

The short answer is that many more issuers will continue to choose to do Rule 506 offerings than Regulation A+ offerings.  That's because most issuers usually have simple goals:

·         Raise money.
·         Raise money quickly.
·         Raise money cheaply with low transaction costs.

If these short-term goals are your only concern, then Rule 506 will continue to be your best alternative. 

The other reason more businesses will use Regulation A+ is that most companies can't attract the large amount of capital that Regulation A+ allows you to raise.  It doesn't make sense to do a Regulation A+ offering is all you want or can raise is $1 million, because of transaction expenses.

Regulation A+ offers the following benefits to both businesses and their shareholders:

·         The legal ability to raise large amounts of capital.

·         Potentially higher valuations, because you can sell to both accredited investors and unaccredited investors and you are not selling "restricted securities."  Investors can legally re-sell unrestricted securities immediately, unless the investor is an affiliate of the issuer.

·         The ability of founders and other insiders to sell some of their shares in the offering

·         The ability to begin to develop a trading market for your shareholders to gain liquidity.

For businesses that want these benefits, doing a Regulation A+ offering vs. a Rule 506 offering probably requires paying higher transaction expenses and a slightly longer time to close the transaction. 

Comparing Rule 506 to both Tier 1 and Tier 2 of New Regulation A+
 
The two tables below compare key provisions of Rule 506 to both Tier 1 and Tier 2 of new Regulation A+ that create the advantages and disadvantages summarized above.

  • Table 1 below describes advantages and disadvantages during the offering process.
  • Table 2 below describes post-offering factors that could affect your decision whether to use Rule 506 or Regulation A+.
Table 1 below clearly shows that Rule 506 offers short term advantages over Regulation A+ with respect to both the timing and the expenses of the offering process. 

But Regulation A+ offers two primary advantages over Rule 506 during the offering process:
 
  • The ability to both offer and sell securities to unlimited numbers of both accredited investors and unaccredited investors
  • The ability of company founders and other insiders to re-sell some of their shares in the offering. 
Table 2 below shows that Regulation A+ also offers issuers who want to develop shareholder liquidity and a trading market that rue 506 dies not provide.

These Regulation A+ advantages are important, because the ability to sell to all types of investors and the investor liquidity advantages can help some businesses achieve higher valuations in Regulation A+ offerings than in Rule 506 offerings.

Why Choose?  Why Not Get the Best of Both Rule 506 and Regulation A+?

Like many things in life, you often face a choice between short-term and long-term needs.

But why should you have to choose?

Why can't you have your cake and eat it too?

If your business needs money quickly, why not:

  • Raise the money your business needs for the next six months by doing a small Rule 506 offering?
  • Then, use part of the Rule 506 offering proceeds to pay the expenses for a bigger Regulation A+ offering at a higher valuation.
Integration Issues

Regulation A+ allows you to combine two offerings as part of a single plan, because Regulation A+ provides that Regulation A+ offerings will not be integrated into any prior offerings.  That means you can start your Regulation A+ offering as soon as you close your Rule 506 offering.

Rule 506 doesn't offer the same flexibility.  Because of integration issues, you probably need to wait for six months after you complete a Rule 506 (b) offering before you can start making offers under a Rule 506 (c) offering, unless your Rule 506 (b) offering fully complies with Rule 506 (c) rules, including taking reasonable steps to verify that all your investors are accredited investors.

The added benefit of doing a small Rule 506 (b) offering and soon after doing a Regulation A+ offering is that most of the time and expenses you incur doing your Rule 506 offering will be for things you would have to do for the Regulation A+ offering.  You can re-use these things in your Regulation A+ offering.  So, your Regulation A+ offering will be faster and cheaper than if you had not done the earlier Rule 506 offering.

Under this two-step capital raising plan:

·         You get the money you need fast and at low transaction cost.
·         Your average valuation for shares sold in the two offerings will probably be higher than if you only did one big Rule 506 offering.
·         You can increase shareholder liquidity alternatives.
·         You can prepare yourself to become a publicly traded company by taking small steps in that direction.
 
Now, let's jump into the details that describe the advantages and disadvantages of Rule 506 and Regulation A+.




 
TABLE 1 – THE OFFERING PROCESS
 
 
Attributes of Rule 506
New Tier 1 Regulation A+ Offerings
New Tier 2 Regulation A+ Offerings
 
 
 
 
General Solicitations to the Public
Rule 506 (c) offerings permit general solicitations.
Rule 506 (b) offerings do not permit general solicitations.
 
Tier 1 Regulation A+ offerings permit general solicitations.
Tier 1 Regulation A+ offerings permit general solicitations.
 
 
 
 
Maximum $$$ Limits
Rule 506 has no maximum amount issuers can raise. 
Tier 1 Regulation A+ offerings have a $20 million maximum per year. 
Tier 2 Regulation A+ offerings have a $50 million maximum per year, but there is no minimum, which means you can do a Tier 2 offering for less than $20 million
 
 
 
 
Pre-Sale State Securities Registration Laws.
 
Rule 506 preempts state securities registration laws for both offers and sales, but state anti-fraud rules always apply.
Tier 1 of Regulation A+ does not pre-empt state securities registration laws for offers or for sales.  Some states may exempt the offering.  State anti-fraud rules always apply.
Tier 2 of Regulation A+ pre-empts state securities registration laws for both offers and sales, but state anti-fraud rules always apply.
 
 
 
 
Post-Closing State Securities Filings and Fees
Issuers in Rule 506 offerings must comply with state post-closing notice and filing fees requirements.
If the Tier 1 regulation A+ offering is exempt under state law, you must comply with state post-closing notice and filing fees requirements.
Issuers in Tier 2 Regulation A+ offerings must comply with state post-closing notice and filing fees requirements.
 
 
 
 
Pre-closing Review by Securities Regulators
Rule 506 offerings are not required to be reviewed or approved by the SEC or state securities administrators before you sell securities.
Tier 1 Regulation A+ offerings are reviewed and approved by both the SEC and state securities administrators before you can sell securities
 
Tier 2 Regulation A+ offerings are reviewed and approved by both the SEC before you can sell securities.
 
 
 
 
Re-Sales of Shares by Existing Shareholders
Rule 506 can only be used by issuers and does not provide an exemption from registration for shareholders.
Tier 1 of Regulation A+ permits up to $6 million of re-sales in the offering by Affiliates of the issuer.
Tier 2 of Regulation A+ permits up to 30% of the offering to re-sales by Affiliates of the issuer up to $15 million.
 
 
 
 
Flexible Disclosure Rules
Rule 506 has very flexible disclosure requirements, if you limit sales to accredited investors.  If you sell to unaccredited investors, disclosure rules are less flexible.
Tier 1 Regulation A+ offering rules require specific disclosures in a specific format.
 
Tier 2 Regulation A+ offering rules require specific disclosures in a specific format.
 
 
 
 
 
 
Audited Financial Statements
Rule 506 does not require audited financial statements, if you only sell to accredited investors.
Tier 1 Regulation A+ offering rules do not specifically require audited financial statements, but state laws (which are not pre-empted) may require audited financial statements.
Tier 2 Regulation A+ offering rules specifically require audited financial statements and state laws are pre-empted.
 
 
 
 
Accredited Investors Requirements
Rule 506 (b) permits sales to up to 35 non-accredited investors and an unlimited number of accredited investors.  Rule 506 (c) allows you to sell only to verified accredited investors.
You can sell to both Accredited Investors and non-accredited Investors in a Tier 1 Regulation A+ offering.
You can sell to both Accredited Investors and non-accredited Investors in a Tier 2 Regulation A+ offering.
 
 
 
 
$$$ Limits on Investors
Rule 506 allows investors to invest any amount.
Tier 1 of Regulation A+ allows investors to invest any amount.
Tier 2 of Regulation A+ allows accredited investors to invest any amount.  Unaccredited investors cannot invest more than 10% of the greater of their net worth or annual income.
 
 
 
 
Verification Requirements
Rule 506 (b) permits self verification by accredited investors.
Rule 506 (c), require issuers to take reasonable steps to verify that all investors are accredited investors.
No verification of accredited investor status is required, because Tier 1 of Regulation A+ permits you to sell to both accredited investors and non-accredited investors.
 
No verification of accredited investor status is required, but Tier 2 of Regulation A+ permits self-verification by non-accredited investors of how much they are permitted to invest.
 
 
 
 
Offering Process Length
Flexible disclosure rules, pre-emption of state securities registration laws and no prior review by the SEC mean there are no regulatory restrictions to delay a Rule 506 offering.
Review by SEC and state securities regulators can delay Tier 1 Regulation A+ offerings.
SEC review can delay Tier 2 Regulation A+ offerings.
 
 
 
 
Offering Expenses
Flexible disclosure rules, pre-emption of state securities registration laws, no prior review by the SEC and no requirement to have audited financial statements combine to lower transaction expenses for Rule 506 offerings.
SEC and state securities regulator review can add expenses to Tier 1 Regulation A+ offerings.
SEC review and audited financial statements requirements can add expenses to Tier 2 Regulation A+ offerings.
 
 
 
 
Integration with Other Offerings
Normal integration rules apply to Rule 506 offerings, which can limit your capital raising choices for six months if you begin an offering and do not raise sufficient funds.
Regulation A+ offering rules indicate you do not integrate a Regulation A+ offering with any prior offering, which means you can start a Regulation A+ Offering immediately after completing another offering.
Regulation A+ offering rules indicate you do not integrate a Regulation A+ offering with any prior offering, which means you can start a Regulation A+ Offering immediately after completing another offering.
 
 
 
 

Table 1 above focuses only on the offering itself though the closing date. 

During the offering process, Rule 506 continues to have substantial advantages over Regulation A+ with respect to both timing and expenses. 

The primary advantage for Regulation A+ during the offering is the ability to both offer and sell to unlimited numbers of both accredited investors and unaccredited investors and the ability of insiders to sell shares in the Regulation A+ offering.  If investors believe you can achieve these goals, you can usually achieve a higher valuation in your offering.

Post-Offering Issues

Table 2 below shows that Regulation A+ offers some advantages over Rule 506 to issuers who have specific post-offering goals to provide liquidity to shareholders, create a trading market and transition to full public company status in multiple steps. 

Some issuers may benefit from starting this process even if they ultimately plan to sell the business rather than becoming a full public reporting company.  Helping impatient shareholders to cash out may help you buy additional time to grow your business before to sell the business at a higher valuation.

 
TABLE 2 – POST OFFERING LIQUIDITY AND TRADING
 
 
Attributes of Rule 506
New Tier 1 Regulation A+ Offerings
New Tier 2 Regulation A+ Offerings
 
 
 
 
Restricted Securities and Re-Sale Restrictions
All shares sold in Rule 506 offerings are "restricted securities" that cannot be re-sold without registration or an exemption from registration.
All shares sold in Tier 1 Regulation A+ offerings are "unrestricted securities" that can be immediately re-sold without registration and without complying with Rule 144 or another exemption from registration.
All shares sold in Tier 2 Regulation A+ offerings are "unrestricted securities" that can be immediately re-sold without registration and without complying with Rule 144 or another  exemption from registration.
 
 
 
 
Rule 144 Re-sales
Rule 506 offers no advantages that enable shareholders to re-sell using Rule 144.
Tier 1 of Regulation A+ offers no advantages that enable shareholders to re-sell using Rule 144.
Tier 2 of Regulation A+ issuers who comply with annual and semi-annual SEC reporting requirements and voluntarily file two extra quarterly reports satisfy the current public information requirements of Rule 144 (c) which facilitates re-sales of restricted securities.
 
 
 
 
Rule 15c2-11 and Brokers Quoting Prices to create A Trading Market
Rule 506 does not require issuers to file SEC reports that can be used by brokers to quote prices in public markets.
Tier 1 of Regulation A+ does not require issuers to file SEC reports that can be used by brokers to quote prices in public markets.
Tier 2 of Regulation A+ requires issuers to file SEC reports that can be used by brokers to satisfy Rule 15c2-11 to quote prices in public markets.
 
 
 
 
Relief from Section 12 (g)'s full 1934 Exchange Act Reporting Trigger by having more than 2,000 shareholders of record or more than 500 non-accredited investors
Rule 506 issuers who sell to many shareholders may trigger Section 12 (g), which requires full 1934 Exchange Act reporting.
Tier 1 Regulation A+ issuers who sell to many shareholders may trigger Section 12 (g), which requires full 1934 Exchange Act reporting
Regulation A+ provides that Tier 2 issuers who comply with Tier 2's SEC reporting requirements and retain a registered transfer agent can avoid Section 12 (g) registration and full 1934 Exchange Act reporting for up to two years after they cease to be "smaller reporting companies."
 
 
 
 

 

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

 
Summary of Key Provisions of New Regulation A+
 
 
Is Title III Crowdfunding Already Obsolete? Regulation A+ = Supercharged Crowdfunding
 
 
Your Goals Will Determine Whether Regulation A+ Is Right for Your Business
 
 
Which Should You Choose: Tier 1 or Tier 2 of Regulation A+?
 
 
Microcap Financings: Regulation A+ Offerings Join Public Shell Company Mergers and Self-Registrations to Create Small Public Companies
 
 
State Securities Law Issues in Regulation A+ Offerings
 


If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at JFV@WardandSmith.com or  you can check out my newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=



 

 

 

 

 

 

 

 

 

1 comment:

  1. Thanks for the post!
    I think such kind of revising could be done with virtual data rooms (for instance Ideals). In this case all the operations would be finished earlier.

    ReplyDelete