Jim Verdonik
Founder of Innovate Capital Law
Contact me at:
(919)616-3225
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newspaper articles at http://www.bizjournals.com/triangle/search/results/_author/Jim+Verdonik?market=triangle&_author=Jim+Verdonik&title=
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+.
