Regulation A

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In the United States under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt it from such registration. Regulation A (or Reg A) contains rules providing exemptions from the registration requirements, allowing some companies to use equity crowdfunding to offer and sell their securities without having to register the securities with the SEC. [1] Regulation A offerings are intended to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of a normal SEC registration and to allow nonaccredited investors to participate in the offering. The regulation is found under Title 17 of the Code of Federal Regulations, chapter 2, part 230. The legal citation is 17 C.F.R. §230.251 et seq.

Contents

On March 25, 2015, the SEC issued new final regulations amending Regulation A. [2] Montana and Massachusetts state regulators sued the SEC requesting a stay that would pause the implementation of Reg A. [3] The rules came into force on July 19, 2015. [4]

Regulation A+

On March 25, 2015, the Securities and Exchange Commission adopted final rules to implement Section 401 of the Jumpstart Our Business Startups Act by expanding Regulation A into two tiers. [5]

An issuer of $20 million or less of securities can elect to proceed under either Tier 1 or Tier 2. The final rules for offerings under Tier 1 and Tier 2 build on current Regulation A and preserve, with some modifications, existing provisions regarding issuer eligibility, Offering circular contents, testing the waters, and "bad actor" disqualification. The new rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for certain Regulation A issuers. Under the final rules, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the SEC on an ongoing basis. On March 15, 2021, businesses using Tier 2 will be able to raise up to $75 million in capital within a 12-month period, as opposed to the previous limit of $50 million (cf. $1 million per state). [6]

Nonaccredited Investors

Regulation A allows the general public to invest in private companies. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Regulation D (SEC), or be subject to certain limitations on the size of their investment.

Tier 1

In addition to qualifying a Regulation A offering with the SEC, companies using a Tier 1 offering must register or qualify their offering in any state in which they seek to offer or sell securities pursuant to Regulation A. Some states provide the option to have Tier 1 offerings that will be conducted in multiple states reviewed through a coordinated state review program by the North American Securities Administrators Association.

Tier 2

Issuers in Tier 2 offerings are required to qualify offerings with the commission before sales can be made pursuant to Regulation A, but they are not required to register or qualify their offerings with state securities regulators. This partially exempts Tier 2 companies from blue sky law securities rules in each state. [7] Tier 2 offerings by such issuers do remain subject to some state law enforcement and antifraud rules. Issuers in Tier 2 offerings may still be subject to filing fees in the states in which they intend to offer securities.

Notable Offerings

Equity crowdfunding platforms CrowdEngine, StartEngine and SeedInvest have facilitated Regulation A+ campaigns. [8] The first successful Regulation A+ campaign was completed by automotive startup Elio Motors, raising nearly $17 million from 6,600 investors. The campaign was designed, produced and marketed by CrowdfundX, [9] a financial marketing firm based in Los Angeles. Elio Motors closed out their Regulation A+ offering in February, 2016, and subsequently listed to the OTCQX, [10] making it the first crowdfinanced IPO in the United States. [11] In July, 2017, Myomo, a medical device maker out of Boston, MA, became the first crowdfinanced IPO to list shares to the NYSE. CrowdfundX also marketed this historic Reg A+ IPO.

The first real estate lending marketplace to obtain SEC qualification utilizing an amended Tier 1 Regulation A offering was Groundfloor, achieving the feat on August 31, 2015. [12] This made Groundfloor the first marketplace open to nonaccredited investors. [13]

On Dec. 3rd, 2015, real estate crowdfunding company Fundrise used the newly expanded Regulation A rules to raise capital for the launch of the world's first online Real Estate Investment Trust.

On Apr. 26th, 2021, fine wine and spirit investment firm Vint qualified under Regulation A to offer collections of fine wine and spirits on the world's first online fine wine and spirits investment platform. [14]

In June 2016, American Homeowner Preservation opened a Regulation A+ offering with what has been called "probably the lowest investment minimum" [15] of any Regulation A+ offering. Their minimum investment is $100.

Testing The Waters

Regulation A allows companies to conduct a publicity campaign and to solicit indications of interest from the public to assess the level of interest in investing in the company. [16] This is intended to help the company decide whether to proceed with a Reg A offering. [17]

Related Research Articles

In the United States under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration. Regulation D contains the rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC. A Regulation D offering is intended to make access to the capital markets possible for small companies that could not otherwise bear the costs of a normal SEC registration. Reg D may also refer to an investment strategy, mostly associated with hedge funds, based upon the same regulation. The regulation is found under Title 17 of the Code of Federal Regulations, part 230, Sections 501 through 508. The legal citation is 17 C.F.R. §230.501 et seq.

OTC Markets Group, Inc. is an American financial market providing price and liquidity information for almost 10,000 over-the-counter (OTC) securities. The group has its headquarters in New York City. OTC-traded securities are organized into three markets to inform investors of opportunities and risks: OTCQX, OTCQB and Pink.

<span class="mw-page-title-main">United States securities regulation</span> Law and regulations that relate to Securities

Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

A special purpose acquisition company, also known as a "blank check company", is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making the private company public without going through the initial public offering process, which often carries significant procedural and regulatory burdens. According to the U.S. Securities and Exchange Commission (SEC), SPACs are created specifically to pool funds to finance a future merger or acquisition opportunity within a set timeframe; these opportunities usually have yet to be identified while raising funds.

A direct public offering (DPO) or direct listing is a method by which a company can offer an investment opportunity directly to the public.

A series A round is the name typically given to a company's first significant round of venture capital financing. The name refers to the class of preferred stock sold to investors in exchange for their investment. It is usually the first series of stock after the common stock and common stock options issued to company founders, employees, friends and family and angel investors.

<span class="mw-page-title-main">Jumpstart Our Business Startups Act</span> United States federal law

The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012. Title III, also known as the CROWDFUND Act, has drawn the most public attention because it creates a way for companies to use crowdfunding to issue securities, something that was not previously permitted. Title II went into effect on September 23, 2013. On October 30, 2015, the SEC adopted final rules allowing Title III equity crowdfunding. These rules went into effect on May 16, 2016; this section of the law is known as Regulation CF. Other titles of the Act had previously become effective in the years since the Act's passage.

MicroVentures is an equity crowdfunding website offering investments in early stage companies. MicroVentures connects accredited investors with startups, businesses and services looking to raise funds or participate in select secondary market opportunities. It is the only major equity crowdfunding site that is a broker-dealer registered by the Financial Industry Regulatory Authority (FINRA) and the first to take a portfolio company to a successful exit. As of October 2013, MicroVentures had raised $20 million, spread among 45 companies including Twitter, Facebook, and Yelp.

Crowdcube is a British investment crowdfunding platform, established by Darren Westlake and Luke Lang in 2011.

<span class="mw-page-title-main">Confidentcrowd</span> American equity crowdfunding portal

Confidentcrowd was an equity crowdfunding portal based in Phoenix, Arizona. The company was associated with the Jumpstart Our Business Startups Act of 2012 and was identified as one of the earliest Crowdfunding portals launched in the United States after the JOBS Act made crowdfunding for equity permissible under US law. The company is also noted for its unusual crowdfunding approach which requires investment seekers to undergo screening by FINRA-licensed Broker-Dealers before they can access potential funding.

The crowdfunding exemption movement in the U.S. is the effort to exempt relatively small investment offerings, sold to the general public in small blocks, from the registration and compliance requirements demanded of large public companies. Inspired by the growth of non-investment crowdfunding, advocates see such exemptions as a way to spur innovation, economic activity, and small-business job creation, but opponents see such changes as invitations to fraud that will target unsophisticated investors. The movement has seen success with the passage of the Jumpstart Our Business Startups Act, which went into effect in 2016, and a growing number of state-level exemptions.

Return on Change (RoC) is an equity crowdfunding platform that connects investors with innovative and socially conscious startups. Return on Change works with startups that operate in five sectors, each of which touches on sustainability in some way: cleantech, edtech, life sciences, social enterprises, and technology. An online equity crowdsourcing platform, RoC helps socially conscious ventures raise capital.

Fundrise is a Washington, D.C.-based financial technology company founded in 2010 that operates an online investment platform. Fundrise has been labeled as the first company to successfully crowdfund investment into the real estate market.

SeedInvest is an equity crowdfunding platform that connects startups with investors online. The company was founded in 2012 and launched in 2013. SeedInvest has focused on building liquidity in the platform by attracting high-net-worth individuals, family offices and venture capital firms. SeedInvest screens and vets deals before allowing them to take advantage of the JOBS Act exemption permitting General Solicitation. In September 2014 the company launched a partnership with Angel Investing website Gust. In October 2018, SeedInvest was acquired by peer-to-peer payment company Circle Internet Financial Ltd.

Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to securities and financial regulation. Equity crowdfunding is also referred to as crowdinvesting, investment crowdfunding, or crowd equity.

Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.

A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the future shares when a priced round of investment or liquidity event occurs. SAFEs are intended to provide a simpler mechanism for startups to seek initial funding other than convertible notes.

An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of "tokens" ("coins") to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ether. The tokens are promoted as future functional units of currency if or when the ICO's funding goal is met and the project successfully launches.

Groundfloor is an American real estate investing and lending marketplace. It was the first real estate crowdfunding company to achieve SEC qualification utilizing Regulation A+ since the regulation became operable through the JOBS Act.

Securitize, Inc is a financial technology company that provides businesses a platform to raise capital from institutional, accredited or retail investors (crowdfunding) with shares issued in the form of digital tokens recorded on the blockchain, including for Oddity and digital custodian Exodus, which used the Securitize platform to raise $75 million in 2021. Securitize also operates a broker-dealer marketplace on which tokenized shares in private companies are traded. Securitize has approximately 3,000 clients with a combined 1.2 million investors and is regulated by both the U.S. Securities and Exchange Commission and FINRA. In June 2022, Securitize became authorized by the Spanish government to enter its securities test environment.

References

  1. ↑ https://www.sec.gov/info/smallbus/secg/regulation-a-amendments-secg.shtml
  2. ↑ https://www.sec.gov/news/pressrelease/2015-49.html
  3. ↑ "SEC refuses to stall 'Regulation A' rules on small offerings". Reuters . 17 June 2015. Archived from the original on 2016-04-25.
  4. ↑ Cowley, Stacy (18 June 2015). "New Rules Let Companies Sell Stakes to Investors of Modest Means". The New York Times.
  5. ↑ Huang, Daniel (18 June 2015). "Small Crowds Get Their Day in Investing Sun". Wall Street Journal.
  6. ↑ https://www.sec.gov/smallbusiness/exemptofferings/rega
  7. ↑ "The Reg A+ Bombshell: $50M Unaccredited Equity Crowdfunding Title IV takes Center Stage". 25 March 2015.
  8. ↑ "F-U-N-D-E-D: Tesla-wannabe Elio Motors raises big from the crowd -- or did it?".
  9. ↑ "Crowdfunding: Elio Motors, CrowdfundX and $30 Million". Forbes .
  10. ↑ "OTC Markets | Official site of OTCQX, OTCQB and Pink Markets".
  11. ↑ Feldman, Amy. "Elio Motors, First Equity-Crowdfunded IPO, Soars Past $1B Valuation Days After Listing Shares". Forbes .
  12. ↑ Ryan Lichtenwald (4 September 2015). "GROUNDFLOOR Is Breaking New Ground With The World's First Regulation A+ Deal". Lend Academy. Retrieved 2 February 2016.
  13. ↑ Kiki Roeder (11 December 2015). "GROUNDFLOOR High Rises with $5M Series A, First of New $100M Fintech Ventures Fund". Hypepotamus. Retrieved 2 February 2016.
  14. ↑ "Vint Raises $1.7 Million in Pre-Seed Funding Led by Fintech Ventures" (Press release). 9 November 2021.
  15. ↑ "Real Estate as an Alternative Investment for Non-Accredited Investors". 23 January 2017.
  16. ↑ "Why every entrepreneur should consider a Mini-IPO". 19 June 2015.
  17. ↑ "A Free Call Option for Startups on Fundraising". 10 July 2015.
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