Viability of Reg A+: SEC relaxes crowdfunding rules

crowdfundingThe SEC recently announced new and amended rules aimed at helping companies raise money from investors via intrastate and small offerings.

Rule 147 has been amended, with Rule 147A being added, both of which ease restrictions on company solicitation of investor capital in intrastate offerings. The Reg D rules were also amended, increasing the limit on equities sold or debt raised within one year, without triggering registration with the SEC.

These additions harken back to The JOBS Act and Reg A+, with the SEC’s continued goal of making capital raising easier for smaller issuers.

Rule 147 and Rule 147A modify the existing intrastate offering rules permitting companies to raise money from investors within their state without SEC registration. These changes tremendously simplify the offering process, saving issuers massive compliance costs.

Previously, issuers were barred from advertising a raise outside their state. This rule quickly became outdated with the rise of online crowdfunding platforms. wherein it was seemingly impossible to restrict online communications to one state, making issuers of intrastate securities unable to advertise their offerings online.

The new rules allow intrastate offerings to reach out-of-state residents if its a state where issuer does business. An issuer must have a reasonable belief that purchasers reside in their state at the time of sale, and a written representation from each purchaser is required.

The changes to Reg D’s Rule 504 increases the aggregate offering amount from $1M to $5M within a one-year period month. Issuers should note that Rule 504 Reg D offerings are still subject to bad actor disqualifications.

 

Commissioner Kara M. Stein said she anticipates the new rules will “enhance the fundraising options available to small and local businesses”, adding “[o]nly time will tell whether we can relax capital-raising regulations, while also maintaining appropriate investor protections.”

 

These changes are important for those analyzing the viability of Reg A+. Crowdfunding “guru” and CEO of Metropole Capital Group, Victoria Silchenko spoke to Crowdfund Insider about whether Reg A+ is the prudent choice for early stage companies. She believes it is a great fit for more mature businesses, due to the high budget for legal fees and marketing expenses. She highlighted Elio Motors, the recent Reg A+ “poster child”, as an example, explaining that Elio “reported $925K in marketing expenses in March 2015 and $1.6M a year later in March 2016.”
 
Silchenko also cautioned emerging growth issues considering Reg A+ to evaluate whether they have a “certain level of financial proficiency, feeling comfortable with the disclosure and understanding the liability bargain.”
 

Lastly, she offered her opinion on the development of secondary markets as a result of the advent of Reg A+ offerings. “Here are my two words AKA two cents: early exits…

As technologies have undeniably sped up the pace of our lives, I am convinced that Regulation Crowdfunding model is set to accelerate the rate at which new-born businesses can create values driven by buyers with much less craving for mega exits and quite possibly with much more realistic expectations than venture capitalists.”
 
Given the on-going development of secondary markets, Silchenko believes that these new secondary markets will allow companies to focus on profitability, rather than high-growth.