Published in the Union Leader
In March, the U.S. Securities and Exchange Commission enacted Regulation A+, to make it easier for businesses to raise capital. Reg A+ is certain to be utilized by growing companies that require significant capital, but it may not be the best option for New Hampshire start-ups and other early stage companies.
Beginning on June 19, 2015, companies will be able to raise up to $50 million a year using Reg A+. The SEC implemented Reg A+ to ease the burdens small companies face in raising capital. As stated by Mary Jo White, Chairperson of the SEC, Reg A+ is intended to provide “an effective, workable path to raising capital.
Reg A+ expands existing Regulation A, a longstanding exemption from the onerous registration requirements imposed on public offerings. Regulation A, as a practical matter, afforded relatively little relief and was rarely used, most notably because it only allowed companies to raise up to $5 million and required registration and qualification in each state where securities were sold.
New Reg A+ has two parts: one that governs so-called Tier 1 offerings, offerings of up to $20 million in a 12-month period, and one that governs so-called Tier 2 offerings, offerings of up to $50 million in a 12-month period. It permits companies to publicly advertise their offerings and, with certain restrictions, to “test the waters” by advertising and gauging investor interest ahead of the preparation of formal offering documents. Additionally, while Tier 1 offerings continue to be subject to both federal and state registration and qualification requirements, Tier 2 offerings are exempt from state registration and qualification requirements.
Although Tier 2 offerings appear to provide significant new opportunities for start-up and early stage companies including the ability to raise capital from non-accredited investors (up to 10% of the greater of their annual income or net worth), both Tier 1 and Tier 2 offerings still require preparation of a formal offering circular containing significant, specified disclosures about the company and the offering similar to a registration statement filed by a public company. Companies conducting Tier 2 offerings also will be required to prepare audited financial statements and to file annual, semiannual, and current event reports with the SEC.
Despite the SEC’s good intentions, the need for a formal offering circular and, with respect to Tier 2 offerings, ongoing reporting make it unlikely that Reg A+ will be the most effective option for startups and early-stage companies seeking to raise capital in New Hampshire. Reg A+ offerings are likely to be most useful to larger, later-stage companies or by early-stage companies that have attracted significant financial backing and can shoulder the burden of extensive disclosure documents, audited financial statements, and ongoing reports. In fact, Reg A+ is also referred to as “IPO-Lite,” and it is likely to be most effective for companies considering a future initial public offering.
For most if not all start-ups and early-stage companies in New Hampshire, existing exemptions from registration, including Rule 506 of Regulation D, are going to continue to provide more efficient, cost-effective, and workable paths to raising capital. For example, Rule 506(c) allows companies to raise unlimited amounts of capital from accredited investors and permits public advertising of the offering. Crowdfunding when the SEC fully adopts rules to permit it, may be another path. Businesses considering raising private capital should consult with a qualified attorney who can help them determine the most appropriate structure that complies with state and federal requirements.
Julie Morse is an attorney in the Corporate Department of McLane Law Firm. She can be reached at (603) 628-1441 or email@example.com.