Regulation A is an exemption from having to register securities with the SEC. It is a way of creating what we call “unregistered offerings”. You may also hear it called a “mini IPO.” The government instituted a change to the regulation through the Jumpstart Our Business Startups (Jobs) Act, so you may even hear people call it Regulation A Plus or Tier 1 or Tier 2. Of course, all of these refer to the same thing. But, for simplicity, we’ll call it Reg A.
Regulation A has its roots in the past, all the way back to the Great Depression. After the market crashed in 1929, Congress decided to remove the right to sell securities and then licensed those rights back. The goal was to protect investors from shady business dealings that marked the 1920s and led directly to the Great Depression.
These changes were eventually codified in what we know today as the Securities Act of 1933, which says that all securities sold in the United States must be registered with the SEC and applicable state securities regulators. Registration is time-consuming, expensive, and drawn-out, but it’s mandatory, even for smaller deals.
Regulation A in Detail
Now that we’ve covered other rules and regulations, as well as their pros and cons, it’s time to introduce Regulation A. You’ll find that it takes care of many of the negatives that marred the other fundraising options, but there are still a few caveats, including the fact that it doesn’t offer an unlimited amount of fundraising. Let’s walk through what you should know.
Let’s start with the fundraising limit for Regulation A. A quick Google search may reveal that the limit is $50 million. Unfortunately, however, that information is outdated. The current limit is $75 million.
In addition to the $75 million maximum raise limit, Regulation A allows you to publicly advertise for investors. There’s no requirement that you already have a relationship with your investors, which opens the door to all kinds of marketing options, including the following:
- Social media sites like Facebook and Instagram
- TV and radio spots
- Newspaper and other print materials
Finally, anyone can invest. There is no rule regarding accredited or unaccredited investors. In that regard, it’s similar to Regulation CF but with a much higher fundraising limit. However, that does bring us to a hurdle, and it’s something we’ve discussed in relation to other options: unaccredited investors can invest up to a certain percentage of their net worth or income. Investors are prohibited from putting more than 10% of the greater amount of their annual income or net worth into any one investment opportunity.
While some might chafe at yet one more rule, it’s there for a good reason: it offers a lot of protection. Imagine taking 10% of your total net worth and setting it all on fire (if the deal goes bad). That’s a significant loss, but at just 10%, it’s a survivable loss. If unaccredited investors could put a more substantial percentage into a deal, it’s possible that they would be wiped out if something went wrong.
The Downsides of Regulation A
We’ve covered a lot of benefits relating to Regulation A. However, there are a couple of downsides that you should understand.
This is a higher-cost option. If you're only looking to raise $5 to $10 million, this is probably not the right choice for you. It's designed for those with much higher fundraising needs, and the cost is commensurate with that the additional process and regulatory requirements.
The other downside is the timeline involved. It takes longer to get your offering to the point where you can invite investors in and accept their money. You should plan on a timeframe of 3-6 three to six months. Some qualification processes may take even longer – up to a year in some instances. That means if you need money quickly, this is not the option for you. Instead, consider Reg D or Reg CF.