Regulation A+: What Entrepreneurs Need to Know

Within the United States, Regulation A+ has become an essential element in the funding landscape for small and medium businesses (SMBs) and entrepreneurs.  This regulatory framework offers a novel pathway for capital formation.  As an amendment to the original Regulation A, it is particularly relevant for businesses exploring alternatives to traditional funding methods such as venture capital or private equity.

Understanding Regulation A+

Originating from the JOBS Act of 2012, Regulation A+ allows smaller companies to offer and sell up to $50 million of securities in a 12-month period. This provision, which comes with specific eligibility, disclosure, and reporting requirements, serves as a hybrid between crowdfunding and the traditional Initial Public Offering (IPO) process.  Notably, Regulation A+ is divided into two tiers:

Tier 1: for offerings up to $20 million

Tier 2: for up to $50 million.

The latter requires audited financial statements and ongoing reporting obligations, but offers exemption from state securities law registration and qualification requirements.

A key aspect of Regulation A+ is its focus on streamlined securities offerings. As the regulation states,

“Regulation A provides an exemption from the registration requirements of the Securities Act for offers and sales of securities up to $50,000,000.”

This highlights the intent of Regulation A+ to simplify the capital-raising process for smaller businesses.

Advantages for Entrepreneurs

The result of streamlined capital formation process for entrepreneurs and SMBs are various benefits.  These include not only access to significant capital without the complexities of a full IPO, but also increased public exposure and the ability to attract a diverse investor base including non-accredited investors.

With that being said, those raising capital under Regulation A+ must be prepared for the financial reporting and ongoing reporting requirements, particularly if they fall under Tier 2. Additionally, the costs associated with legal and accounting services for compliance can be substantial.

Successes Under Regulation A+

To date, there have been scores of successful examples of SMBs leveraging Regulation A+ in an attempt to raise capital.  The following are a few examples of these.

• Elio Motors: In 2015, Elio Motors utilized Regulation A+ for a mini-IPO, successfully raising $17 million.  This move demonstrated the efficacy of Regulation A+ in public fundraising.
• Myomo Inc.: A medical robotics company, Myomo Inc., took advantage of Regulation A+ to go public.  It raised significant funds, showcasing how Regulation A+ can be a viable pathway to going public for small businesses.
• Chicken Soup for the Soul Entertainment: This media company effectively used Regulation A+ to raise capital, illustrating the regulation’s utility beyond the traditional tech startup scene.

Comparing Regulation A+ with Other Regulations

Regulation A+ stands in contrast to other funding regulations like Regulation D, which is typically used for private placements.

Meanwhile, unlike crowdfunding, which often has lower capital limits, Regulation A+ allows for larger fundraising efforts.

Compared to traditional IPOs, Regulation A+ is a more streamlined and cost-effective approach for smaller companies.

Conclusion

Depending on the goals of an entrepreneur or SMB, Regulation A+ may represent asignificant opportunity to access capital markets with a lower barrier to entry.  However, it requires a careful consideration of compliance requirements and associated costs.

The decision to utilize Regulation A+ should be made with a clear understanding of the company’s financial and strategic position.

Key Takeaways

• Innovative Funding Path: Regulation A+ offers small to mid-sized businesses an alternative route to raise up to $50 million, bridging the gap between crowdfunding and IPOs.
• Tier System: Entrepreneurs need to understand the differences between Tier 1 and Tier 2, each with its own set of benefits and obligations.
• Diverse Implementations: Success stories like Elio Motors, Myomo Inc., and Chicken Soup for the Soul Entertainment illustrate the versatility and potential of Regulation A+ across different industries.
• Compliance and Costs: While offering significant advantages, Regulation A+ requires diligent compliance with financial reporting and ongoing SEC requirements, along with the need for professional legal and accounting services.
• Comparison with Other Regulations: Regulation A+ should be evaluated against other funding options like Regulation D, crowdfunding, and traditional IPOs, considering the specific needs and capabilities of the business.