Regulation A+ allows the public to invest in private companies. Startups can use a Mini-IPO under Reg A+ to turn their customers into investors.
Reg A Background
On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation called The JOBS Act into law. The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises.
Initially, private companies could only crowdfund from accredited investors, the wealthiest 2% of Americans. On June 19, 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allows private growth-stage companies to raise money from all Americans.
What is Regulation A+?
Reg A+ of Title IV of the JOBS Act is a type of offering which allows private companies to raise up to $50 Millionfrom the public.
Like an IPO, Reg A+ allows companies to offer shares to the general public and not just accredited investors. Companies looking to raise capital via Reg A+ will first need to file with the SEC and get approval before launching amini-IPO. However, the fees associated with a Reg A+ offering are much lower than a traditional IPO and the ongoing disclosure requirements are much less burdensome, effectively making a Reg A+ offering a mini-IPO.
How is Reg A Different from a Reg D Offering?
The key difference between Reg A and Reg D is that companies raising under Reg D can only accept investments from Accredited Investors while those conducting a Reg A offering are able to accept funds from both accredited and non-accredited investors.
Why Would I Do a Reg A+ Offering?
Reward Early Adopters
Startup companies who are entering the growth stage often owe a large part of their success to their early adopters. By pursuing a Reg A+ offering, a company is inviting its users to share in that success. Offering customers a financial stake rewards early adopters for the role they played in the company’s growth.
Galvanize the User Base
By inviting its early adopters to participate in a Reg A+ offering, a company can help turn users into brand evangelists. Research shows that customers who have a vested interest in the future of a business are more likely to recommend that company to others and increase the amount they spend with the company.
Retain Control of Your Company
Reg A+ allows entrepreneurs to raise a large sum of capital from a large pool of investors. By raising small amounts from many investors, an entrepreneur can spread out ownership of the company more broadly. Oftentimes, institutional investors require a certain level of control alongside their investments which can even result in an entrepreneur getting kicked out of their own company. In a typical Reg A+ offering, a company will not need to cede board seats or agree to other potentially adverse mechanisms that are typical when raising venture capital or private equity.
Efficient Process for Raising Capital
Conducting a Reg A+ offering allows companies to tap into an eager and engaged source of capital. By bringing these investors online, startups can potentially secure funding quickly and efficiently. The Testing The Waters process allows a company to assess whether there is investor demand for an offering by soliciting indications of interest before deciding whether to proceed with a Reg A+ offering.
Who is Reg A+ Right For?
Companies Looking to Raise Between $3 – $50 million
Because of the costs associated with conducting a Reg A+ offering, Reg A+ is most likely not worth it for smaller fundraises of under $3 million. Currently, for most seed and bridge rounds, an old-fashioned raise from accredited investors still makes more sense.
Consumer-Facing Companies with Clear Value Propositions
People looking to invest in companies raising via Reg A+ will be most inclined to invest in companies with products or services that they use themselves or which deliver a clear value proposition to the average consumer. Consumer-facing companies with well-defined product/service offerings resonate well with the average investor and are well positioned for Reg A+.
Companies with Large & Engaged User Bases
A company’s customers can serve as a natural source of investments in a Reg A+ offering. A large, enthusiastic user base will be more likely to invest in a company, drive initial investment momentum, and be able to help a company quickly fill its round.