Reg A + Puts Fun Back in Funding

Fun in funding

Reg A + Puts Fun Back in Funding

Imagine raising up to $50 million for your innovative or impact-driven company, at 1/10 the cost and difficulty of a public offering. Think of it as crowdfunding on steroids – a “mini-IPO”. This is a way to describe the recent Regulation A investment process included in the JOBS Act, which became available June 19, 2015.

If you’ve heard about Reg A + as a method for funding small and medium businesses, now it’s time to get excited about it. The purpose of this post is to tell you why Intelliversity and I are so excited about it and why you should be too.

Only once before in the history of Intelliversity (the non-profit business funding academy that I lead) have I been so excited about an opportunity for innovative businesses. The first time was the discovery six years ago of Revenue Royalties as an alternative asset class. At that time, I thought that Intelliversity was the first to develop the idea, only to find that Arthur Lipper and others had done so years before. (Arthur is now the Chairman of Intelliversity’s Board of Advisors.)

The new discovery, this time definitely not my creation, is known as Regulation A+ which first appeared as Title IV of the JOBS Act in 2012. Title IV of the JOBS Act covers liberalization of the funding mechanism known as Regulation A, now known informally as Reg A +. Regulations enabling Reg. A+, developed by the SEC, went into effect June 19, 2015.

So why is Reg. A+ an important improvement over the older original Regulation A process? It’s true that the original Regulation A procedure allowed for a mini-IPO at reduced cost and reduced SEC review. However, there were several problems that made the older process unworkable.

  • One was the dollar limit of $5 million raised.
  • Second was the average 228 days that the SEC took to review each issue.
  • Third, the original Regulation A allowed each state to impose its own review procedure.

That made the application process even more expensive and time-consuming. Issuers, as a rule, shunned Regulation A for other funding methods that allowed for raising larger amounts. However, those methods came with much effort of their own. There remained a need for an improved Regulation A.

On the surface, improvements in Title IV of the JOBS Act seem like an evolutionary improvement on the old Regulation A. On the surface, even with the JOBS Act improvements, Reg. A+ does not seem attractive as compared to alternatives. It’s true, the amended Regulation A (Reg. A+) raised the limit of funding to $50 million per year and eliminated the need for state-by-state review.

However, to take advantage of this streamlined process, two years of audited financials are required. After funding, semi-annual reports and event reporting to the SEC. Worse, like crowdfunding, with Reg. A+ the company seeking funds has to invest in the promotion of the offering. That added a considerable expense. So at first glance Reg. A+ seems like a lot of work and expense, surely not worth the effort as compared to say a private placement for wealthy investors.

But let’s look again. What makes Reg. A+ worthwhile and exciting for many companies are three interesting aspects:

  1. Testing the Waters – The SEC allows you to promote the offering BEFORE undertaking the expense of writing the offering documents or paying for audited financials. This allows you to build a list of interested investors (subscribers) who have told you, in effect, to contact them as soon as you are ready to accept their investment dollars. This is a major advantage At relatively little cost, you can find out exactly how popular your offering will be and how much you can raise. You can also use your new subscribers list for other kinds of marketing.
  2. You can use Reg. A+ for debt offerings as well as equity. This means that you can use it to market a revenue-sharing offering (“revenue royalties”) which gives you a great deal of flexibility in when you pay back investors, yet without having hundreds or thousands of stockholders. This has to be verified by your securities attorney.
  3. The SEC has demonstrated its willingness to speed up the review process. As an example, Elio Motors, the poster child of Reg. A+ raised over $17 million within a few months of the Reg. A+ process becoming available.

Elio Motors is using a part of the nearly $17 million it raised in a public offering through Reg A+ to build 23 prototypes for testing and validation. Elio said the funding raised in the Reg A+ process was critically important in helping the company get to this development stage. Elio introduced the company’s first E-Series test vehicle – dubbed the E1A at a recent event in Livonia, Michigan. Elio called this “an event brought to you by Reg. A+.”

Now do you see why we are excited about Reg. A+ and why, if you are an innovator or impact-driven entrepreneur, you should be too?

Connect with me and the Intelliversity team on our website to learn more about Reg. A+ as an option for your business.

Connect with me on LinkedIn.

Bear in mind, we are a non-profit educational academy, not attorneys, bankers, brokers or accountants.  Always obtain professional advice regarding your specific circumstances and needs.