Regulation A+ Expands Investor Base for Small Business, or Does It?

Small Business
Regulation A+ Expands Investor Base for Small Business — or Does It?

Startups and small businesses have a new way to raise money from wealthy as well as ordinary investors.

Regulation A+, part of the Jumpstart Our Business Startups (JOBS) Act, went into effect June 19, opening up investor options for privately owned businesses. The regulation allows businesses to raise up to $50 million a year from both “accredited” and non-accredited investors. Accredited investors are those with a net worth of at least $1 million or annual income of at least $200,000. In exchange for their money, investors get an equity stake in a company.

There’s a catch, however. Although Regulation A+ might allow startups to attract new investors and capital, it’s most likely to help only later-stage companies because it comes with complicated and expensive legal requirements, says Corbin Holt, director of marketing at Crowdfunder, an equity crowdfunding platform that connects entrepreneurs and investors.

How Regulation A+ works

Regulation A+ has two tiers, each with different requirements: Tier I allows companies to raise up to $20 million in a 12-month period, while Tier II allows companies to raise up to $50 million over 12 months.

Under Tier I, companies need to pass a state review before they can raise money from investors in a state, Holt says. “In any state you take money from investors, you have to file with that state individually, which is a little bit of a barrier,” he says.

Businesses don’t face these state filing requirements under Tier II, since it pre-empts state securities regulations, known as Blue Sky Laws. However, Tier II requires companies to file audited financial statements, which is a “costly and time-consuming process,” Holt says. Tier II also limits how much money non-accredited investors can invest: no more than 10% of their income or net worth each year.

Compliance can be expensive

The total cost of raising money under Regulation A+ can range from $85,000 to $100,000 when you factor in all of the costs, says Tanya Prive, co-founder and chief executive at Onevest, a startup investing platform. By contrast, so-called Regulation D offerings, which often don’t require companies to register their securities with the SEC, typically cost $7,000 to $20,000, according to Prive. (However, Regulation D does put significant restrictions on investment by non-accredited investors and limits how a company can solicit investors.)

“I think it’s going to be later-stage companies that are going to be interested in Regulation A+ — not your typical bootstrap, family-funded startup,” she says.

What Title III can do for you

Another provision of the of the JOBS Act, known as Title III, should help earlier-stage companies, as it will let them raise up to $1 million annually from both accredited and non-accredited investors, Holt says. The SEC could take final action on Title III in October 2015.

“The details for Title III aren’t hammered out yet, but we are hoping for something that is more accessible to seed- and Series-A-type companies,” Holt says, “allowing them to take in investment from non-accredited investors and effectively open up much more access to capital.”

Title III will have a bigger effect than Regulation A+, as there are many more companies at an earlier stage, Holt says.

“My biggest takeaway: The SEC is definitely open to this,” Holt says, “and you can say they are testing the waters with Regulation A+, ramping up to nailing Title III and making it workable for companies.”

To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email:Steven.N@nerdwallet.com. Twitter: @StevenNicastro.


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