Reg A+ and crowdfunding have come a long way. A report by the SEC shows that in 2019 alone, Reg A+ crowdfunding raised over $2.216B in Tier II offerings. But, navigating regulations can be challenging when trying to raise capital as a start-up. Here is a quick guide to understanding the basics of Reg A+ crowdfunding, the different types of SEC crowdfunding, and their requirements.
JOBS Act Paved The Way For Crowdfunding
The Jumpstart Our Business Startups (JOBS) Act was enacted in 2012 to make it easier for small businesses to access capital. The JOBS Act did this by creating new exemptions under Securities and Exchange Commission (SEC) Rule 506.
In September 2013, the first exemption became effective, Reg D Rule 506(c). Regulation D (Reg D) allows unlimited advertising of securities offerings but restricts the issuer to only accept funds from “accredited investors.” Next, Regulation A+ (Reg A+) became effective in June 2015. This exemption was a revision of an existing one already in place. Finally, Regulation Crowdfunding (Reg CF) went into effect in May 2016. Reg A+ and Reg CF opened the door for issuers to raise capital from the general public.
What is Reg D Crowdfunding?
Reg D crowdfunding is a much more traditional approach to raising capital. Reg D permits companies to raise unlimited money, but only through accredited investors. Reg D requires that companies only solicit investors through “private placements” or direct, personal communications. Issuers cannot publicly advertise their offering. Reg D does not require much preparation before being sold, no audit requirements when selling to accredited investors, and there are no reporting requirements after the offering.
Reg A+ and Reg CF: What is the difference?
For decades, private companies were only permitted to raise capital from accredited investors, limiting investing to Americans with a specific net worth of wealth. The JOBS Act and the enactment of Reg A+ and Reg CF changed that. Now, companies can raise money from both accredited and non-accredited investors. While Reg A+ and Reg CF have similarities, there are a few key differences.
Reg CF: Equity Crowdfunding
Regulation CF (also called Reg CF, Equity Crowdfunding, or Title III Crowdfunding) has several specific mandates, including:
- Issuers must file with the SEC and present certain disclosures.
- The funding group must be incorporated in the US and primarily do business in the US or Canada.
- Companies may raise up to $5M in a 12-month period through accredited and non-accredited investors.
- Reg CF offerings must be made available through SEC-registered broker-dealers or funding portals.
- Disclose specific financial information, and depending on the amount raised, financial statements may require a review or an audit.
Reg CF is the most flexible of the three exemptions in terms of fundraising. Companies can raise money from accredited and non-accredited investors through broker-dealers and funding portals, and there is no limit to how many people can invest.
Reg A+: Mini-IPOs
Reg A+, also known as mini-IPOs, is an improved version of an older (and hardly used) Regulation A. Before Reg A+, companies could only raise up to $50,000 from non-accredited investors. The JOBS Act increased the maximum amount that could be raised from non-accredited investors to $75M. In addition, the JOBS Act directed the SEC to create additional rules and regulations to exempt specific securities offerings from state registration requirements.
Reg A+ has created a two-tier system:
- Tier 1: Permits investments up to $20M, requires state review, but benefits from a lenient compliance framework on the federal level.
- Tier 2: Permits investments up to $75 million, is subject to a more rigid compliance regime on the federal level than Tier 1, but benefits from preemption of state securities laws.
Reg A+ Exemption Requirements
Reg A+ also has requirements before a company can utilize this exemption. For a business to take advantage of the Reg A+ exemption, it must:
- File an offering circular with the SEC similar to a traditional IPO prospectus.
- The company must be incorporated in the US and have its primary place of business in the US or Canada.
- Reg CF offerings must be made available through SEC-registered broker-dealers, and there is no limit to how many people can invest.
- Requires extensive financial disclosure documents (subject to review and comments by the SEC) before sales of securities may commence.
- May require audited financial statements (Tier 2).
Both Reg A+ and Reg CF offer advantages for companies looking to raise money from non-accredited investors, but each has different requirements and restrictions.
Audits and Reviews for Reg A Crowdfunding
Companies undergoing equity crowdfunding may be required to get an audit under PCAOB or AICPA guidelines or a review. We can help.
Assurance Dimensions is a PCAOB-registered accounting firm and certified by AICPA. Our talented PCAOB accounting professionals understand the complex rules associated with PCAOB audits and regulatory compliance when raising capital. Contact us today for a consultation.
