On Wednesday, March 25, the Securities and Exchange Commission announced its unanimous approval of the final rules for Title IV of the Jumpstart Our Business Startups Act, also known as the “JOBS Act.”
The announcement, which Kiran Lingam of Crowdfund Insider described as “a bombshell,” may well be a crowdfunding game changer as it paves the way for startup companies and other businesses to raise very significant amounts of capital directly from the general public. The new set of regulations, which are jointly referred to as Regulation A+, will enable companies to raise up to $50 million per year from the general public through what might be viewed as mini-initial public offerings. As a result, stock and other security offerings under Regulation A+ will provide to everyday Americans new ways of investing in private companies that have heretofore been legally restricted to high net worth investors.
While crowdfunding techniques could be used to raise capital under Regulation A+, it is important to note that the section of the JOBS Act that is the basis for Regulation A+, Title IV, is not the part of the JOBS Act that was enacted by Congress to specifically establish online portal-based crowdfunding.
Correspondingly, when the new rules go into effect on June 19, 2015, a broad range of enterprises, from start-ups to well-established corporate institutions will be provided with unprecedented new opportunities for raising capital directly from a pool of more than two hundred million potential investors.
In a statement accompanying the SEC’s announcement, SEC Chair Mary Jo White noted that “[i]t is important for the commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies,” predicting that the new rules would “provide an effective, workable path to raising capital that also provides strong investor protections.”
While crowdfunding techniques could be used to raise capital under Regulation A+, it is important to note that the section of the JOBS Act that is the basis for Regulation A+, Title IV, is not the part of the JOBS Act that was enacted by Congress to specifically establish online portal-based crowdfunding.
Unfortunately, the SEC continues to drag its feet regarding the implementation of the rules regarding that part of the JOBS Act, Title III. In fact, the SEC still hasn’t issued the final rules for Title III, despite the fact that the JOBS Act, itself, required the SEC to have the final rules in place by early 2013. The new target date announced by the FTC for the final Title III rules is currently sometime in October 2015. But many observers, including this author, believe that the SEC will likely miss that target and once again postpone the publication of the final Title III crowdfunding rules.
But in the wake of the SEC’s creation of Regulation A+, there is now a real question as to whether Title III federal crowdfunding will be attractive, or even relevant, to entrepreneurs seeking to raise investment capital via crowdfunding.
If the SEC formally adopts the preliminary Title III crowdfunding rules that it published last year (which were almost universally criticized by the crowdfunding community), the costs associated with compliance with filing and reporting requirements could make crowdfunding under Title III comparatively less desirable than crowdfunding in association with a Regulation A+ offering under Title IV financial statements.
But perhaps more importantly, is the fact that stock and other securities in a Regulation A+ offerings can be legally marketed via the Internet. This feature, in association with Regulation A+’s offering limit of $50 million, will enable start-ups and other businesses to essentially crowdfund capital raises of much greater amounts than what will be permissible under Title III which has a yearly limit of only $1 million.
Additionally, Regulation A+’s higher yearly individual investment amount (10 percent of the investor’s annual income or net worth) compared to Title III’s investment limit of $2,000 per year, may provide another reason why a company may elect to raise capital under a Regulation A+ offering instead of via Title III crowdfunding campaign.
Stocks and other securities offered under Regulation A+ will be regulated under a two-tier regulatory system set up by the SEC’s new Title IV rules.
Tier 1 permits securities offerings of up to $20 million in a 12-month period, with not more than $6 million being offered by selling security holders that are affiliates of the issuer. Unfortunately, unlike Tier 2, Tier 1 offerings are subject to state securities regulations, including compliance with state securities qualification and registration requirements in each state in which the stock or other security is offered.
It remains to be seen if the cost of such compliance with state “Blue Sky” laws will diminish the attractiveness of Tier 1 offerings under Regulation A+. To reduce the cost and complexity of the multi-state securities law compliance, the North American Securities Administrators Association (NASAA) has introduced a coordinated review process for Regulation A+ that is designed to dramatically reduce the costs and other burdens associated with this process.
Tier 2 allows securities offerings of up to $50 million in a 12-month period, with not more than $15 million being offered by selling security holders that are affiliates of the issuer. Unlike Tier 1, Tier 2 offerings are generally exempt from state securities law registration and qualification requirements. But also unlike Tier 1 offerings, a Regulation A+ offering under Tier 2 triggers significant additional federal reporting requirements, including annual, semiannual and current event reporting obligations and requirements to provide audited financial statements.
For both tiers, all selling security-holders are limited to no more than 30 percent of the aggregate of an initial offering or subsequent offerings for the first 12 months after the initial offering. Also, all securities sold pursuant to a Regulation A+ offering will be unrestricted as to resale, subject to any contractual restrictions imposed by the issuer.
Because of this, many envision that there will be robust trading of Regulation A+ stocks, and perhaps even the emergence of a new stock exchange specializing in the facilitation of the trading of Regulation A+ issued stocks. The rules and procedures associated with a stock offering under Regulation A+ are voluminous and complex. Any offering under Regulation A+ will require substantial assistance from an attorney, not only for the initial filing and registration of the offering with the SEC, but also to be sure that required ongoing compliance is properly done.
Further information about the new Title IV rules and Regulation A+ offering can be obtained from the SEC website at https://www.sec.gov or by contacting my office at the number in my bio where this column started. Additional crowdfunding articles about federal and state crowdfunding can be obtained at PiccionelliSarno.com.
This article is for educational purposes only and nothing in this article is intended to be, or should be considered to be, legal advice.
Gregory A. Piccionelli is an entertainment attorney with more than 20 years’ experience specializing in entertainment, Internet and free speech matters. He can be reached at Piccionelli & Sarno at (747) 220-6820 or greg@piccionellisarno.com.
