Regulation A+ allows the public to invest in private companies. Startups can use a Mini-IPO under Reg A+ to turn their customers into investors.
Reg A Background
On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation called The JOBS Act into law. The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises.
Initially, private companies could only crowdfund from accredited investors, the wealthiest 2% of Americans. On June 19, 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allows private growth-stage companies to raise money from all Americans.
What is Regulation A+?
Reg A+ of Title IV of the JOBS Act is a type of offering which allows private companies to raise up to $50 Million from the public.
Like an IPO, Reg A+ allows companies to offer shares to the general public and not just accredited investors. Companies looking to raise capital via Reg A+ will first need to file with the SEC and get approval before launching a mini-IPO. However, the fees associated with a Reg A+ offering are much lower than a traditional IPO and the ongoing disclosure requirements are much less burdensome, effectively making a Reg A+ offering a mini-IPO.
How is Reg A Different from a Reg D Offering?
The key difference between Reg A and Reg D is that companies raising under Reg D can only accept investments from Accredited Investors while those conducting a Reg A offering are able to accept funds from both accredited and non-accredited investors.
Why Would I Do a Reg A+ Offering?
Reward Early Adopters
Startup companies who are entering the growth stage often owe a large part of their success to their early adopters. By pursuing a Reg A+ offering, a company is inviting its users to share in that success. Offering customers a financial stake rewards early adopters for the role they played in the company’s growth.
Galvanize the User Base
By inviting its early adopters to participate in a Reg A+ offering, a company can help turn users into brand evangelists. Research shows that customers who have a vested interest in the future of a business are more likely to recommend that company to others and increase the amount they spend with the company.
Retain Control of Your Company
Reg A+ allows entrepreneurs to raise a large sum of capital from a large pool of investors. By raising small amounts from many investors, an entrepreneur can spread out ownership of the company more broadly. Oftentimes, institutional investors require a certain level of control alongside their investments which can even result in an entrepreneur getting kicked out of their own company. In a typical Reg A+ offering, a company will not need to cede board seats or agree to other potentially adverse mechanisms that are typical when raising venture capital or private equity.
Efficient Process for Raising Capital
Conducting a Reg A+ offering allows companies to tap into an eager and engaged source of capital. By bringing these investors online, startups can potentially secure funding quickly and efficiently. The Testing The Waters process allows a company to assess whether there is investor demand for an offering by soliciting indications of interest before deciding whether to proceed with a Reg A+ offering.
Who is Reg A+ Right For?
Companies Looking to Raise Between $3 – $50 million
Because of the costs associated with conducting a Reg A+ offering, Reg A+ is most likely not worth it for smaller fundraises of under $3 million. Currently, for most seed and bridge rounds, an old-fashioned raise from accredited investors still makes more sense.
Consumer-Facing Companies with Clear Value Propositions
People looking to invest in companies raising via Reg A+ will be most inclined to invest in companies with products or services that they use themselves or which deliver a clear value proposition to the average consumer. Consumer-facing companies with well-defined product/service offerings resonate well with the average investor and are well positioned for Reg A+.
Companies with Large & Engaged User Bases
A company’s customers can serve as a natural source of investments in a Reg A+ offering. A large, enthusiastic user base will be more likely to invest in a company, drive initial investment momentum, and be able to help a company quickly fill its round.
Companies That Want To Make a Large Splash
Mini-IPOs are about more than just raising capital. In addition to fundraising, Reg A+ offering as a chance to engage customers and build large-scale publicity and brand awareness. The best Reg A+ offerings are managed and promoted like a significant product launch. Such an approach helps make the offering a key marketing opportunity to build a company’s brand and reputation. When executed correctly, a Regulation A mini-IPO can also be a robust customer acquisition channel, just as with a “typical” product launch.
The Mini-IPO Process
1. Testing the Waters
Before committing to a mini-IPO, companies are permitted to test the waters (this is optional). This enables companies to gauge the potential success of a Reg A+ offering and make an educated decision on whether or not to move forward prior to spending time and money on the SEC approval process. Testing the waters is completely free on SeedInvest, simple and in no way obligates a company to actually launch a Reg A+ offering.
During a testing the waters campaign, companies invite potential investors (including customers) to make indications of interest. These are the dollar amounts that a potential investor would be interested in investing if the company decided to pursue a Reg A+ offering.
2. Qualification Process
After a company has decided to pursue a mini-IPO, they will need to spend the first month drafting a Form 1-A with the help of SeedInvest (and obtain reviewed or audited financials).
After filing the Form 1-A, SeedInvest will work with the company over the next 2-3 months to turn any comments from the regulators and then file the final prospectus after being “qualified” by the regulators.
Once regulatory qualification has been received the company may launch its Mini-IPO. SeedInvest’s online platform has been engineered to seamlessly accept investments online, including verifying investor identities, performing anti-money-laundering checks on investors, facilitating investment document execution, funds transfer and regulatory compliance.
SeedInvest will also work with the company to market its fundraise by employing a three-tiered strategy to promote the round and secure investments:
- Target the company’s customers and the SeedInvest investor network to build initial momentum and excitement
- Target early-adopters, the company’s extended network and affinity groups
- Target the public through robust press, advertising and digital campaigns
Throughout the Reg A+ offering, SeedInvest will work in tandem with the company to effectively communicate with investors, manage investor relations, and support the operations of the campaign.
4. Completion of the Offering
SeedInvest automates the entire closing process and ensures that all legal and regulatory obligations are met.
Tier I vs. Tier II Offerings
Companies pursuing a mini-IPO can choose between two types of Reg A+ offerings, Tier 1 and Tier 2.
Reg A offerings can use Tier 1 or Tier 2
Concerns about Reg A
What are the downsides of utilizing a Mini-IPO?
- Legal and accounting fees can potentially be higher than under a traditional raise from accredited investors.
- Regulatory approval prior to closing investments will most likely take 2-3 months.
- More investors (although this can also be a benefit as long as it’s managed appropriately).
- Tier II raises will be subject to ongoing public reporting (although this can be a benefit for companies planning to potentially exit through a full-blown IPO down the line).
What if my testing the waters campaign fails?
The testing the waters campaign is an opportunity for users to express their interest and the indications are non-binding. So long as you communicate to your customers that you are just considering a Mini-IPO, they will understand if you decide not to proceed. If you receive less interest than anticipated or decide not to proceed for any other reason, you can easily explain to your users that you will be raising capital in another way, and/or that they may have other chances to invest in the future.
What will my existing investors think about a Reg A+ round?
Existing investors may be initially skeptical of a Reg A+ offering simply because it is new and non-traditional. It is important to remember the following details about Mini-IPOs:
- Most companies simply test the waters first to make sure there is sufficient investment interest prior to approaching their board of directors for approval to launch a mini-IPO.
- Reg A+ can be part of a larger round. Companies might decide to raise 70% of their round from venture capitalists and hold back the remainder for their customers/users.
- Mini-IPOs are about more than just fundraising. They are an opportunity for a company to make a large marketing splash and create an army of brand ambassadors.
At what point do I have to commit to holding a Reg A+ offering?
A company doesn’t need commit to a Reg A+ offering until after they conduct a testing the waters campaign. A company can test the waters for free through SeedInvest to determine investment interest and has no obligation to move forward.
How is this similar and different to going public?
Regulation A+ actually has more similarities to traditional fundraising under Regulation D than to an IPO, except that it allows companies to raise capital from all investors and requires a degree of regulatory review.
The SeedInvest team works closely with companies raising funds through a Regulation A Mini-IPO
Working with SeedInvest to raise using Reg A
SeedInvest works with companies to pull together its offering materials, to navigate the regulatory approval process and to ensure that their fundraises are conducted in a regulatory compliant manner. In addition, SeedInvest’s online platform has been engineered to seamlessly accept investments online.
Streamlined Process and Platform
SeedInvest’s comprehensive, robust platform has been built to support Reg A+ in its entirety. SeedInvest’s state-of-the-art platform facilitates the process of closing investments from thousands of investors by verifying investor identities, performing anti-money-laundering checks on investors, facilitating investment document execution, funds transfer and regulatory compliance
Navigating Rules and Regulations
The rules and regulations surrounding Reg A+ offerings can seem daunting at first. The SeedInvest team has a comprehensive understanding of the financial regulations surrounding Regulation A+. Our team was part of the movement in 2011 and 2012 which ultimately resulted in the passage of the JOBS Act on April 5, 2012 and have worked closely with regulators to implement the changes in security laws. Since Title IV of the JOBS Act went into effect on June 19, 2015, we have been the primary source for information surrounding the emerging mini-IPO process.
Glossary of Terms
Maximum Offering: This is the maximum amount that a company can raise in any 12 month period.
Investor Types: These are the investors who are allowed to participate in an offering. There are no restrictions on who can invest in a company raising under Reg A+.
Individual Investment Limits: This is the maximum amount an individual investor can invest in a company raising under Reg A+.
General Solicitation: These are the restrictions on a company advertising its raise to the public. There are no restrictions to whom a company raising under Reg A+ can advertise.
Offering Documents: These include the prospectus and the subscription agreements.
Ongoing Disclosure: These are the filings required after a Reg A+ offering.
Ability to Terminate Ongoing Reporting Requirements: This is the point at which a company must no longer comply with ongoing reporting requirements.
Transfer Restriction: These are the limits placed on selling shares bought through a Reg A+ offering. Reg A+ shares can be fully transferable immediately but there is currently not a liquid secondary market for Reg A+ shares.
State Pre-Emption: This allows a company to by-pass review by the states to launch a Reg A+ offering, going solely to the SEC.
This post was written by SeedInvest on October 28, 2016
Raising Capital using a Regulation A+ Mini-IPO