Jim Verdonik
Founder of Innovate Capital Law
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(919)616-3225
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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
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Attributes of Rule 506
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New
Tier 1 Regulation A+ Offerings
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New
Tier 2 Regulation A+ Offerings
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General Solicitations to the
Public
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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
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Attributes of Rule 506
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New
Tier 1 Regulation A+ Offerings
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New
Tier 2 Regulation A+ Offerings
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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
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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."
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Other articles about important
Regulation A+ issues include the following:
Summary of Key Provisions of New Regulation A+
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Is Title III Crowdfunding Already Obsolete? Regulation
A+ = Supercharged Crowdfunding
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Your Goals Will Determine Whether Regulation A+ Is
Right for Your Business
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Which Should You Choose: Tier 1 or Tier 2 of Regulation
A+?
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Microcap
Financings: Regulation A+ Offerings Join Public Shell Company Mergers and
Self-Registrations to Create Small Public Companies
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|
State
Securities Law Issues in Regulation A+ Offerings
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Thanks for the post!
ReplyDeleteI 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.