On April 5, 2012, President Barack Obama signed the Jumpstart Our Business Startups Act (or JOBS Act), with the goal to create more opportunities for both entrepreneurs and investors. What this act did was set in motion laws that would allow everyday investors to purchase shares in startups. This was known as Regulation A, and it was officially implemented in 2015.
Who is Eligible To Invest?
Traditionally, only individuals who could easily invest in startups, whether buying debt in a restaurant or equity in the next mobile app, were accredited investors. Accredited investors are those who:
Have made over $200,000 in annual salary for the past two years
Or have made over $300,000 in joint annual salary (for spouses) over the past two years
Or have over $1M in net worth, excluding their primary residence
In August 2020, the SEC expanded the definition of accredited investors to add new eligibility criteria, which include holders of certain professional licenses as well as limited liability companies and “family offices” with at least $5M in assets or assets under management respectively. However, the definition of “accredited investors” is still quite limited and only applies to a small subset of the population.
But with Regulation A+, (Regulation A+ or Reg A+ is the colloquial name given to Regulation A) companies can raise money from the entire public: both accredited and non-accredited investors can participate. It is no longer fundraising from the wealthy, but from the crowd: friends, family, users, community members, and more can all participate in a raise.
What Are Regulation A+ Companies?
Regulation A+ can be thought of as an alternative to a small registered IPO and as either an alternative or a complement to other securities offering methods that are exempt from registration under the Securities Act of 1933. As amended, Regulation A+ provides an exemption for U.S. and Canadian companies to raise up to $75 million in a 12-month period.
The framework is meant to provide a more cost-effective means of raising capital for companies wishing to avoid the hefty expenses, resources, and reporting obligations typically required under the Exchange Act when selling public securities.
Which companies are eligible to use Reg A+?
Reg A+ offerings are available to U.S. and Canadian companies, both private and public. The following companies are not eligible to use Reg A+:
- “blank check companies”; defined as development stage companies that either have no specific business plan or purpose, or have indicated that their business plan is to merge with or acquire an unidentified company or companies
- companies required to be registered under the Investment Company Act of 1940 (this mostly applies to companies whose primary functions are investing, reinvesting, and trading in securities)
- companies disqualified under a “bad actor” rule ( e.g., if the issuer or other related parties have received criminal convictions, court injunctions, SEC disciplinary orders, etc.)
What securities can be sold using Reg A+?
Reg A+ allows for equity securities, debt securities, and securities that are convertible or exchangeable into equity interests, as well as guarantees of these securities.