Regulation A+: Has Equity Crowdfunding Truly Arrived?
Have securities regulators finally given the greenlight to equity crowdfunding? That is the debate that has emerged since the Securities and Exchange Commission acted late last month to adopt new rules for Title IV of the JOBS Act, commonly referred to as Regulation A+, which will allow start-ups to raise up to $50 million in an IPO.
Headlines have hailed the rules as “game-changing,” saying they are “greenlighting equity crowdfunding” and paving the way for “anyone to invest in start-ups.” But it’s important to keep in mind that the rules do not go into effect until 60 days after they’re published in the Federal Register, and it’s unclear what impact they will have on the start-up industry and investors.
Here are the main highlights from the rules:
- The new rules increase the maximum amount that can be raised in a Regulation A+ (Reg A+) offering from $5 million to $50 million.
- They create two “tiers” of offerings. Tier 1 offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 offerings allow companies to raise up to $50 million in 12 months. Companies conducting Tier 2 offerings will be required to provide audited financial statements as well as file annual, semiannual and current event reports.
- The new rules remove an administrative burden by eliminating the “Blue Sky” laws that required companies to individually register their offerings in every state where their securities were offered
- The change attracting the most attention is that the rules allow all investors – both accredited and non-accredited investors – to participate in these deals.
It’s this last point – that start-ups can raise money from “the crowd” -- that has headlines proclaiming that these new rules signal the real launch of equity crowdfunding. Once the rules go into effect all investors, not just wealthy ones, will be permitted to invest in start-ups.
But we will have to wait to see if the headlines become reality. Many crowdfunding platforms currently allow only accredited investors to participate in offerings, and they may choose to keep those guardrails up even after the rules are implemented. Just because crowdfunding sites can allow unaccredited investors to participate does not mean they have to and some may want to avoid the risk of working with investors who are new to investing in these types of offerings.
In addition, when many investors hear the word IPO, they often think of a flashy company like Alibaba, which last year won the title for the largest global IPO ever with a $25 billion offering. But Reg A+ offerings are being referred to as “IPO-Lite” or “mini-IPOs.” They will not be hot deals that pop in an opening day of trading. Instead, these are meant for small- to medium-sized companies that might not be well-known and will likely need to keep their offering open for up to 12 months to gather interest in their shares.
Investors who participate in these deals shouldn't expect the shares to be traded on the Nasdaq or NYSE, where daily stock quotes make the value of each share easy to ascertain. A robust secondary market does not exist for these shares. Instead, investors should be prepared if necessary to hold their shares until another exit occurs, such as the company going public through an IPO or being acquired.
For self-directed IRA investors who are already familiar with the longer holding periods of certain investments, like private placements, Reg A+ offerings may align well with your retirement investments, which tend to have naturally longer time horizons.
No matter how these new rules play out, when it comes to Reg A+ offerings, it’s clear that investors will need to conduct their own thorough due diligence. Investors should be sure that they understand what they are investing in, that they are comfortable that the price per share fairly values the company, and that these investments fit into their overall investment strategy.
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