Investing in startup and growth-stage businesses has generally been limited to accredited investors. Accredited investors are individuals with annual compensation of at least $200,000 for the last two
years or a net worth of at least $1,000,000 (not counting personal residence). Startups solicited accredited investors primarily because they could offer and sell securities to accredited investors without all of the time and expense involved in doing a public offering. While SEC regulations have permitted private placements to be made without the requiring a full-blown registration statement, these private placement transactions have been limited to accredited investors and a maximum of 35 non-accredited investors.
Well, times are changing. President Obama signed the American JOBS Act into law in 2012. The JOBS Act had several provisions designed to improve the financial opportunities available to Americans. Title IV of the JOBS Act, referred to as Regulation A+, was added in 2015, and allows businesses that wish to raise between $3 million and $50 million to do so from both accredited and non-accredited investors regardless of net worth or income levels.
What is Regulation A+? Regulation A+ allows businesses to use equity crowdfunding platforms to raise as much as $50M from both accredited and non-accredited investors. Regulation A+ is divided into two parts, Tier 1 and Tier 2. Tier 1 allows businesses to raise up to $20M while Tier 2 allows businesses to raise up to $50M.
Tier 1 – Raise up to $20M. Under Tier 1:
- Anyone anywhere in the world can invest in the business
- The business may publicly advertise
- Financial Statements are required for the business
- The offeror must satisfy the Blue Sky laws in each US state that investors live in
- There is no limit on the amount an investor may invest
Tier 2 – Raise up to $50M. Under Tier 2:
- Anyone anywhere in the world can invest in the business
- The business may publicly advertise
- No state Blue Sky registration required
- Audited Financial Statements are required for the business
- The per year investment of a non-accredited investor is limited to 10% of income or net worth
Who Can Invest? Both accredited and non-accredited investors can invest in startups under the Regulation A+ exemption.
Must Offeror Verify Investor’s Accredited Status? Technically no. But investors are assumed to be non-accredited investors unless their status is confirmed by the offeror. Accredited investor are permitted to invest more than nonaccredited investors so determining status is still important.
What Must be Done with the SEC to Offer under Regulation A+? Under Tier 1, the offeror is required to: (1) file a disclosure document and get qualification letter from the SEC; (2) have business Financial Statements prepared and reviewed; and (3) register under the Blue Sky laws in all states investors invest from. Under Tier 2, the offeror is required to: (1) file a disclosure document and get qualification letter from the SEC; (2) provide audited Financial Statements; and (3) prepare and file required annual, semi-annual and current disclosure reports
What are the Nonaccredited Investor Limits under in Regulation A+? Under Tier 1, the investor has no restrictions on the amount invested. Under Tier 2, non-accredited investors have limits on the amount they can invest. Non-accredited investors can invest a maximum of 10% of their annual income or net worth per year, depending on which is greater.
Why Not to Use Regulation A+ If your business needs to raise less than $3 or 4 million, then Regulation A+ is probably not cost-effective, compared to other methods like Equity Crowd-Funding.
If you are interested in learning more about or private placement transactions please contact one of our business attorneys at 937-223-1130 or JSenney@pselaw.com
