Pros and Cons of Raising Growth Capital Under SEC Regulation A+
If you’re looking for growth capital to fund your private company’s ambitions, you have a range of options. Spurred by the 2012 JOBS Act, and following the introduction of “general solicitation” under SEC Regulation D in 2013, we’re now seeing additional new ways to raise growth capital under the new Regulation A+ rules, most notably opening up this so-called ‘IPO-Lite’ to non-accredited investors.
Let’s take a closer look at Reg A+, and examine how an IPO-Lite compares to a full IPO.
The Cost of Going Public
Going public through a full IPO has become a very expensive and time-consuming process. Consequently, many private companies are waiting until much later in their growth trajectory to go public than before, as exemplified by the record number of businesses in the billion-dollar club that are still private.
In contrast, an IPO-Lite under Reg A+ is much less costly. Between legal, auditing, filing, reporting, and other fees, an IPO-Lite is more likely to cost in the range of high five to low six figures. That is relatively modest compared to a full IPO, which costs well over a million dollars according to PWC data.
Still, preparing an IPO-Lite takes time. The disclosure requirements are lighter than those for an IPO S-1, but they’re still significant. Plus, the process of SEC review will take several months from the day of filing to getting “qualified” to raise capital, whether directly, through a placement agent, or a broker-dealer.
Tier 1 and 2 of Reg A+
The old Reg A had such a low fundraising limit and high compliance cost that it was almost never used – Ben & Jerry’s being a notable exception back in the 1980s. Companies could only raise up to $5 million in capital, from accredited investors only, and they had to file the offering in every state in which they were selling their investment opportunity (the so-called ‘blue sky laws’).
The new Reg A+ now allows private companies to raise more capital, and from both accredited and non-accredited investors. It comes in two flavors: Tier 1 and 2.
Tier 1 is for fundraises up to $20 million, yet still requires state registration. Under Tier 2, companies can raise up to $50 million, and offerings do not have to be reviewed by every state, which significantly reduces the cost of compliance.
Other differences between Tier 1 and 2 are related to the SEC requirements for initial filing and ongoing reporting, with Tier 2 generally being more strict and burdensome.
Deciding if Reg A+ Is Right For Your Company
Reg A+ won’t suit every company, or growth stage. Reg A+ can be the right solution for companies in a later stage in their growth trajectory, by providing an intermediate step between traditional venture capital funding and going fully public. Yet, Reg A+ is not necessarily the appropriate fundraising option for early stage startups. Why not?
The Reg A+ preparation, filing, and reporting requirements aren’t as rigorous as those for a full IPO, yet they are a significant step beyond the business plans and budgets startups typically show angel investors or VC firms. For many early stage companies, meeting these requirements will be too expensive or too time-consuming to be practical.
That’s why Reg A+ is most useful for a mature, later stage private company that is prepared to do the work, take the time, and bear the cost required for this more formal type of offering.
Stages of a Reg A+ Offering
Companies that are considering conducting a Reg A+ offering should understand the five key stages of the process, from start to finish, and beyond:
- Getting Ready
- Testing the Waters
- Filing with the SEC
- Conducting the Offering
- Filing Ongoing Reports
Stage 1. Before you embark on a Reg A+ offering, you’ll want to make sure your company is structured properly, that you’re ready to take on a new group of shareholders, and that your intellectual property is secure enough that you feel comfortable releasing information to the public.
Stage 2. You’ll be able to “test the waters” before undertaking the time-intensive process of creating a full offering statement. This means you can publically promote your potential offering and gather indications of interest – after which you can decide to proceed (or not).
There are rules regarding what can and can’t be said during this preliminary interest-gathering phase, so working with a securities specialist to review all communications is essential. For instance, as soon as a Reg A+ offering is filed with the SEC (Stage 3), you need to communicate your filing documents.
Stage 3. Depending on the type of Reg A+ offering (Tier 1 or 2), your company may need to file audited financials, as well as an offering circular, with the SEC. These materials have to be filed through EDGAR, the SEC’s online filing system.
The SEC will review the offering circular, ask questions, and request amendments to the disclosure, and then “qualify” it, allowing you to proceed. Note that SEC “qualification” by no means should be interpreted as a recommendation – it simply means that you are allowed to make an actual Reg A+ offering now.
Stage 4. Once your offering circular has been “qualified,” you can’t test the waters anymore. At this point, you’ll need to be working with a licensed broker-dealer who can legally sell the securities you’re offering.
Stage 5. After your offering has closed, depending on the type of offering, you may need to continue filing ongoing reports, including semi-annual and annual financial reports and current event reports. Events that require reporting include for instance a principal executive leaving the company, a private sale of a large number of outstanding shares, or changes in the rights of shareholders.
Those are just the basics of the five stages of course, each warranting a much more elaborate examination.
Reg A+ offers private companies looking for growth capital meaningful new avenues for substantial funding, while complying with reasonable and manageable reporting requirements.
Reg A+ can especially be an attractive new option for mature private companies that want to raise capital without going fully public (yet), providing liquidity for early investors, and creating an intermediate capital formation step on the road to a full IPO.
Slowly but surely, the JOBS Act is changing the investing landscape for the better, for issuers and investors alike.