Good news for small and medium sized businesses! The SEC has recently approved the final rules for Reg A+ and they will go into effect May 25, 2015. What the SEC has come up with is a two Tier system for small business securities offerings. A business can choose either Tier 1 (limited to $20 million in a 12 month period) or Tier 2 (limited to $50 million in a 12 month period), however both of these represent a significant increase from the previous limit of $5 million for a Reg A offering. The rules vary slightly depending upon which Tier is chosen, but both are intended to further the purpose of the JOBS Act of 2012 in making it easier for small business to access capital.
These are public offerings, although the regulatory requirements are limited compared to a full IPO both before and after the securities are sold. Some have therefore referred to these offerings as “IPO lite”. There are still regulatory requirements for the offering which must meet SEC guidelines, however the specific requirements will vary depending on the Tier that is chosen.
For example, if Tier 2 is chosen, the preemption of state law means that it need not be approved by any state, filing with the SEC will suffice. However, if Tier 1 is chosen, it must be submitted early enough prior to the offering so that the states in which it will be offered can identify any issues as state laws are not preempted in this case. In both situations, investment is an option for accredited and non-accredited investors which opens up a potentially huge opportunity for small businesses to obtain capital. Other differences are Tier 1 has no limits on individual investments, whereas Tier 2 limits an individual investor to 10% of the greater of net worth or annual income; in addition the financials for a Tier 1 offering need only be reviewed and certified by an accountant, whereas a Tier 2 offering will require a full audit Reg 5-X. Finally, as long as the marketing falls within the “test the waters’ requirement or is in the form of a Preliminary Circular (Forms provided by SEC), there is no restriction of who may be solicited.
This loosening of restrictions should provide small and mid-sized businesses with another avenue to obtaining needed capital where more traditional routes may not be available or are too costly. There is a great deal of flexibility also in what types of securities may be sold, including; debt instruments, equity, option, etc. For more information, contact our office or check out the SEC website at www.sec.gov/rules/final/2015/33-9741.