Regulation A+ Dissected
Accredited investors, meaning individuals who make over $200,000 in income or who have $1 million in assets (excluding their primary residence), for over 80 years have enjoyed a monopoly when it comes to investing in startups in America. In a monumental move, the Securities and Exchange Commission (SEC) put an end to that by getting Congress to pass a new securities legislation called Regulation A+, which represents one of the biggest changes in the financial services industry to date. Regulation A+, which went into effect on June 19, 2015 is part of Title IV of the Jumpstart Our Business Startups Act, better known as the JOBS Act that President Obama signed into law in 2012.
In a nutshell, the act did two major things. First, it allowed private companies to openly solicit investors, on the Web and elsewhere. Secondly, the act paved the way for unaccredited investors (basically, people who aren’t professional investors, don’t have more than $1 million in assets, and don’t make more than $200,000 a year), to take part in these private placements. Before Reg A+, small companies could only raise capital from accredited investors and smaller investors would be left out completely. Accredited investors make up less than 1% of the US population, meaning 99% of people previously couldn’t invest in startups even if they understood the risk and had the liquid capital to deploy. This limitation was debilitating for both parties, but with the passing of Reg A+, now companies have the ability to raise up to $50 million from accredited and non-accredited investors alike. This is a game changer for the general population and small companies needing growth capital to develop.
You can imagine how it would feel if you watched someone you knew who qualified as an “accredited investor”, invest in an early stage company like Uber and you couldn’t because you didn’t meet the qualifications required for that type of investment. Fast forward a few years and you see their investment return 5,000% and change their life forever while you sit there and think about what could have been. Well, Regulation A+ changes all of that and those types of investments are now available for everyone regardless if you’re a school teacher, gardener, hair stylist or any type of profession. It’s important to remember that it changes the investment pool for the good and the bad, because while those “unicorn” type of stories like Uber get us excited, there are a ton of smaller companies that will fail. So there are plenty of pitfalls when it comes to investing in early stage companies.
For those of you who are big gamblers and would like to throw it all on red when it comes to a certain company, Reg A+ does have limitations they put on you for good reason. Reg A+ only allows investors to invest 10 percent of the greater of their annual income or net worth in these securities. The SEC has also implemented other strong investor protections such as “bad actor” background checks on the companies offering the securities, and disclosure of the company’s financial information as part of the offering.
So how does the Reg A+ process work for both companies and investors?
If a company is looking to raise capital utilizing Reg A+, they can conduct a process that the SEC has labeled as “Testing the Waters.” What that means is that they can go out and begin soliciting non-binding indications of interest (i.e., “Testing the Waters”) to both accredited and non-accredited investors via online advertising or by utilizing sites like Sprout Equity. At that point, the company is NOT ALLOWED to accept ANY money from those investors who filled out their “Indication of Interest” forms. All the company is able to do at that point is evaluate the response they receive from their offering to see if it’s worth them moving forward with a full blown offering with the SEC. If they choose to do so, they will then begin the due diligence process of the SEC which could take as long as 6 months to complete. Once and if the SEC has declared the offering to be “qualified,” the company can then go back out to those investors who filled out their “Indication of Interest” form and ask them for money. Now as an investor, it’s important to understand that even though you filled out that “Indication of Interest” form for that particular company, you need to remember that it is non-binding. So if you filled it out on January 1 and the company doesn’t have an effective offering until July 1, you can back out when they call you and ask for your check. That’s the beauty of Reg A+. You can thank the SEC for putting all of this together!