What is Reg A+ and how has it driven change in raising capital?

Regulation A (‘Reg A’ or ‘Reg A+’) was long an obscure, rarely used section of the Securities Act (1933). But in 2012, that changed dramatically. In 2012, the Obama administration as part of the JOBS Act (Jumpstart Our Small Business Act) , amended Reg A (affectionately now called Reg A+) to make it easier for startups to raise money from retail investors, i.e.: the public. By 2015, this change went into effect—and equity crowdfunding was born. With increased limits on how much a company can raise, the term “mini-IPO” is now often used to describe capital raised by going direct to consumers as investors with equity.

What is Equity Crowdfunding?

Equity Crowdfunding is the process of raising funds for a company’s specific purpose (growth, expansion, launch, etc.) from the general public. What does that mean for companies looking for funding? With today’s technology and the internet allowing for a global reach, crowdfunding has become incredibly efficient: it now enables  companies looking to raise capital  to reach a much wider audience than traditional VC firms. Through equity crowdfunding, emerging companies can pitch their businesses directly to prospective investors, allowing an exciting business to raise needed capital to get off the ground.

Companies That are Eligible for Reg A+

As one law firm explains, both public or private companies in the US and Canada are eligible under Reg A+ to raise equity capital. But certain businesses are prevented from doing so:

• So-called Special Purpose Acquisition Companies (otherwise known as blank check companies)
• Companies for whom Investment Company Act of 1940 registration is required (typically investment firms)
• Issuers disqualified due to criminal convictions or regulatory orders 

The Importance of a Reg A+ Exemption

Traditionally, companies that wanted to sell shares to the public (and raise capital that way) needed to register those securities with the Securities and Exchange Commission . Otherwise, they must rely on an exemption. Being able to rely on a prescribed exemption can be incredibly important for a company, as it means they’re not subject to the same level of reporting requirements as registered firms. Indeed, in the case of Reg A+ offerings, the SEC notes: “...smaller companies in earlier stages of development may be able to use this rule to more cost-effectively raise money.” Taking the time to understand the various Reg A+ exemptions can ensure your directed capital raise falls within the guidelines.

Understanding Tier 1 and Tier 2 

Companies pursuing a Reg A+ exemption from the SEC to raise capital must indicate whether they intend to sell shares under a Tier 1 or Tier 2 offering. 

Tier 1 offering: Raise up to $20 million USD in any 12-month period. This figure may include up to $6 million USD in secondary sales by the issuer’s affiliates. 

Tier 2 offering: Raise up to $75 million USD from equity investors over the course of any 12-month period. This total may include secondary sales to a maximum of $22.5 million USD in secondary sales from their affiliates. 

Tier 2 Example

Miso Robotics Raise Powered by DealMaker

• Closed and onboarded 5,394 new investors‍
• Raised over $26.5 Million
• 52% of investor funds transacted through cardless digital payment
• Average investment order increased by 68% with access to real-time data for remarketing

Rules Regarding Reg A+

For a traditional, SEC-registered IPO, there is a strict prohibition (a “quiet period”) on communicating with investors prior to the offering. Crucially, this communication ban is not imposed on Reg A issuers. Unlike their larger counterparts, Reg A+ companies are permitted to “test the waters” by communicating with prospective investors prior to the offering itself. This gives them a chance to gauge the public’s interest in their equity securities. It is mandatory, though, to submit any promotional materials to the SEC along with the offering statement. 

As mentioned, Reg A+ offerings are less onerous for companies than SEC registration. That said, there are still a number of requirements that prospective issuers must be aware of before selling shares to the public. For sales connected to Tier 1 offerings, a company must be compliant with all state-level qualification and blue-sky requirements. Blue-sky rules aim to protect the public from fraud via “the supervision and regulation of offers and sales of securities”. Also, Tier 2 saves the hassle of state-by-state registration (especially when leveraging a broker dealer). However, companies electing to rely on Tier 2 should note that:                                                     

                                i) They will be subject to ongoing reporting requirements after the offering has been completed and 

                                ii)Tier 2 investors are limited in how much they can invest.

Companies pursuing either a Tier 1 or Tier 2 offering must use Form 1-A to file an offering statement with the SEC. Included in this statement is the offering circular, which is the primary disclosure document provided to prospective investors. Issuers must either 

                                 i) Provide the circular to potential investors or

                                 ii) Provide instructions for how it can be accessed. 

Before a company may actually sell shares to the public for money, its offering statement must be ‘qualified’ by the staff of the SEC. 

How Do I Get Started?

If it seems like a lot to remember, don’t worry. DealMaker makes it easy. With a raise through our platform, you can have peace-of-mind that you are meeting SEC requirements, filing the correct forms, and communicating to investors in a compliant manner.

‍