JR Lanis writes:
The Securities and Exchange Commission has issued new rules, termed Regulation A+, which were promulgated under Section 401 of the 2012 Jumpstart Our Business Startups Act, also known as the JOBS Act, which expand upon the previous Regulation A. The new rules ease securities laws to allow smaller and independent investors to engage in the rapidly expanding equity crowdfunding market. These equity-based crowdfunding platforms are different from other “social’ crowdfunding websites, such as Kickstarter, which offer backers non-equity based incentives to participate.
Previously, only accredited investors—generally defined as individuals who earn over $200,000 in income or who have $1 million in assets (excluding their primary residence)—were permitted to purchase shares in private companies through equity crowdfunding. Accredited investors make up less than 1% of the U.S. population, severely limiting those who could invest. Traditionally, the other 99% of investors had to wait for a company’s initial public offering to purchase its stock. This protected less sophisticated investors from the risks inherent in early stage investments, but it also meant that most Americans were prevented from getting in “on the ground floor” of the next Facebook or Google.
Regulation A+ creates two new tiers of exempted filings for issuers that would have been ineligible under the previous Regulation A rules. Tier 1 provides an exemption for securities offerings of $20 million or less, annually. These offerings will be available to accredited and unaccredited investors without restriction. Tier 2 provides an exemption for securities offerings of $50 million or less, annually. Accredited investors may purchase securities in Tier 2 offerings without limit. However, unaccredited investors are limited to 10% of the greater of their annual revenue or net assets.
As the SEC democratizes the equity crowdfunding market with Regulation A+, it is also implementing new regulations to increase protections for these new investors. Most notably, an issuer in Tier 2 will be required to submit audited two-year financial statements to the SEC. Tier 1 filers generally need only provide an unaudited balance sheet and income statement for two years. Some experts believe that Regulation A+ will primarily help startups that have exhausted their ability to raise “seed” money.
Regulation A+ affords the general public the opportunity for outsized gains previously only available to accredited investors. It also means that early stage companies have additional sources of capital available to them. However, first-time investors should remember that returns are not guaranteed. For every Uber and Snapchat, there are countless companies that do not survive.
Alan A. “JR” Lanis, Jr., is a partner in Fox Rothschild’s Los Angeles (Century City) office.