Friday, June 19, 2015

Reg A+ is Effective Today; Still Waiting for Crowdfunding Rules

The SEC's rules to facilitate Regulation A+ become effective today.  The rules implement Title IV of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act).  Title IV Small Company Capital Formation  raised the cap on the amount of securities that can be sold in a 12 month period from $5 million (under Reg A) to $50 million (under new Reg A+), subject to disclosure requirements (e.g., a certified audit) not required for ordinary Reg A offerings.

Market watchers are not expecting that the newly effective Reg A+ rules will have much of an impact on start ups and small businesses that don't already have the cash necessary to comply with its  requirements.  The big development yet to occur is SEC adoption of final rules for Title III of the JOBS Act titled Crowdfunding.  In Title III, Congress directed the SEC to write rules implementing an exemption from securities laws for crowdfunding via the internet, and rules for a funding portal by which internet-based platforms could facilitate a market for securities without registering with the SEC as brokers.  The SEC published proposed rules for comment in October 2013 and the public comment period closed in February 2014.  The SEC announced that the final rules will be released in October 2015.

Crowdfunding sites are already operating to offer securities for accredited investors only under Regulation D.  Some commentators see a bleak future for crowdfunding for non-accredited investors under the rules the SEC has proposed.   The SEC estimates that to raise $100K via non-accredited investor crowdfunding, an issuer would have to incur around $39K in fees for accountants, lawyers and the funding portal.  To raise $1 million the estimated costs tops $150K.  An offering under Reg D, although restricted to accredited investors, is relatively light on required disclosure and much cheaper.  So, if/when the SEC promulgates the final crowdfunding rules, it may be that only the most desperate issuers will use it.

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