Update: The new rules for Regulation A go into effect Friday, June 19.
Sometimes good things are worth the wait.
When the Jumpstart Our Business Startups (JOBS) Act--a sweeping law aimed at encouraging the growth of small businesses by easing certain financing regulations--passed into law, headlines were aflutter over a provision that would allow less-wealthy people to invest in private companies in exchange for equity. This provision catalyzed an entire would-be industry known as crowdfunding equity investing. That was three years ago.
While a final ruling on the provision is still in a holding pattern, this week the Securities and Exchange Commission issued a new set of updates that all but upstage that long sought after crowdfunding ruling.
As part of the JOBS Act, the SEC released on Wednesday a new set of rules that update Regulation A, a requirement dating back about 80 years, which limits private companies to raising $5 million from public markets.
The new regulation, dubbed Regulation A , has expanded that amount to $50 million in a two-tier system, essentially in increments of $20 million. Both tiers would allow companies to tap unaccredited investors in these deals, who have less than $1 million in investable assets and make less than $220,000 a year. And companies seeking $20 million in investment or more would no longer need to get state by state approval for a stock sale. Instead, they only have to submit their plan to the SEC. While unaccredited investors could participate previously in Regulation A offerings, such deals were much smaller and were rarer occurrences.
In some ways, the most recent SEC rule changes steal the thunder of the crowdfuding provisions companies and investors await under the JOBS Act's Title III, which will allow unaccredited investors to participate in smaller offerings of up to $1 million.
"The great thing about regulation A , is that companies searching for more than $20 million can leapfrog the state regulatory process," says Douglas S. Ellenoff, a securities and crowdfunding expert and partner at law firm Ellenoff, Grossman and Schole in New York. For the deals up to $20 million, each state can add its own comments to the proposed sale, which adds time and cost, Ellenoff says.
There are tradeoffs for the larger deals up to $50 million, too. The process would require a comprehensive audit by the SEC before getting approval for a stock sale, as well as annual and perhaps quarterly filings, Ellenoff warns. The filing procedure is likely to cost tens of thousands of dollars in attorney and accounting fees, he adds.
More mature companies are expected to benefit, while smaller companies--in particular startups, which typically seek far less money--may not see as many gains, becuase they usually don't need to raise $20 million.
"I don't think it is all that beneficial for earlier-stage companies, but it might help us later on," says David Johnson, chief operating officer and chief financial officer of Fireman's Brew.
Fireman's Brew, a five-employee microbrewery in Woodland Hills, California is in the process of raising $5 million by soliciting private placements state by state, a time-consuming and expensive process. In the past the brewery has raised $2.5 million from California investors, based on that state's own fundraising rules, which allow for limited private investment from so-called qualified investors, with a net worth of $250,000 and an annual income of more than $100,00.
Still, some companies are eager for the change. For crowdfunding company Fundrise, for instance--which primarily sells real estate deals of $50 million or more to accredited investors--the rule change also opens its business up to bigger deals, a quicker process, and a wider base of potential investors.
"It will allow us to access not just the high net worth investors, but anyone who wants to invest in our deals," says Ben Miller, chief executive of Fundrise. He adds that filing papers only with the SEC will save time and effort.
Similarly, Slava Rubin, chief executive of crowdfunding site Indiegogo, says the rule change could assist the company if it creates an equity investing component in the future.
"We're encouraged by the SEC's progress towards finalizing equity crowdfunding rules," Rubin said in an email.