Why the New Regulation A+ Rules Will

Rock the Crowdfunding World

Image from VIctoriaGlobal.co

The US crowdfunding industry hit a major milestone on March 25 this year as the SEC passed into
law Reg A+ under Title IV of the JOBS Act after years of prolonged deliberation and advocating by
stakeholders.
Industry experts, entrepreneurs and investors have eagerly anticipated for the passing into law of
this regulation to facilitate the democratization of investment by paving way for a greater
participation from the general public, mostly unaccredited investors.
But to what extent will this new law cause a convergence of crowdfunding towards its claim as a
democratized means of investing? Furthermore, to what extent will the predictions of industry
observers and experts about a boom in the market come to pass? These are critical issues that are
capable of shaping and influencing the outcome of the new law on the industry landscape at least
in the near future.
Since it gained traction in the alternative finance landscape, crowdfunding has been regarded as a
democratized means of investing that allows participation from the general public regardless of
income group or social class. However, the full import of this claim has not been realized as

regulations by the SEC have prevented participation from the majority of average investors
(mostly unaccredited investors).
As a result, the passing into law of Reg A+ is meant to remove this limitation. Reg A+ is a
development upon RegA which allowed for participation from unaccredited investors but with a
limitation of being subject to state blue sky laws and a cap of $5 million as total amount that can
be raised in an offering. Reg A+ allows for companies to raise higher amounts in what has been
termed a mini IPO. In essence, not only startup or early stage businesses but even growth stage
firms can now raise funds from the crowd as an alternative to Venture Capitalists, Angels and other
traditional investor groups.
The new law has two separate tiers under which companies can raise funds from both accredited
and unaccredited investors. Tier 1 requires a company to register with the SEC, be subject to state
blue sky laws (reviews and fees) but without having to file their audited accounts with the SEC.
The maximum amount that can be raised under this tier is placed at $20 million per annum. Under
tier 2 on the other hand, a company is exempted from state blue sky laws (preemption) and can
raise up to $50 million from investors online.
According to Scott Andersen, Partner at consultDA, Congress, by allowing general solicitation and
advertising in the capital formation process, opens broad possibilities for entrepreneurs and new
and seamless investment opportunities for the public. Scott is also the General Counsel for
FundAmerica.
The SEC has also placed a limit on the amount average investors can commit into a company in a
bid to protect them from losing their investments to companies know as bad actors. As a result,
investments by unaccredited investors have been pegged to 10% of the greater of their annual
income or net worth.
Companies will also have to submit their audited reports and must go through a registered transfer
agent. Already, FundAmerica, a crowdfunding platform provides services that could make this
process easier for issuers.
This latest development is capable of becoming an industry game changer as unaccredited
investors, who up till now have only been able to participate in a handful of Reg A deals offered by
platforms like Fundrise (that were state specific), can now become active players in the industry
playing field.

Furthermore, crowdfunding platforms looking to extend their offerings to unaccredited investors

but which have been unable to do so due to unfavorable state blue sky laws have now been
provided a low pressure route, thanks to RegA+.
According to Scott Purcell, founder and CEO of FundAmerica, Crowdfunding for securities will
enable millions of businesses to get the capital they desperately need to grow and create jobs.
This will usher in a boom period the likes of which this country, and the world, has never seen.
The steps for filing for a RegA+ offering involves preparation of the offering documents and audit
reports which could then be submitted online through EDGAR to the SEC using the form 8a shortform.
In comparison to Reg D Rule 506(c), the industry standard for registering offerings, Reg A+ is a bit
more complex as it involves more time and cost (in form of legal and administrative charges) and
greater level of account disclosure. Nevertheless, it has the advantage of allowing participation
from unaccredited investors and the exemption of offerings from state blue sky laws.
However, the limitations of a greater time, cost and disclosure requirement could negatively affect
its adoption by platforms and companies (already used to operating under the Rule 506), which
could in turn weaken its impact on the market.
In less than 60 days, Reg A+ will take effect. While many industry experts have predicted a boom
in the market as an after effect of its passage, the willingness of platforms and companies to
undergo the time and cost consuming requirements it entails will determine to a great extent the
level of its adoption in the industry. As a result, the convergence of crowdfunding towards its claim
as a democratized means of investing depends to a large extent on whether stakeholders are
willing to pay the price of undergoing the somewhat stringent requirements involved in order to
bring its benefits to a larger percentage of unaccredited investors.
Despite these considerations, the prospect of growth stage companies having their products or
services validated by the crowd (in a mini IPO) before finally going public should drive its adoption.
This should in turn add to the boom currently experienced in the crowdfunding market. Heres the
summary for the new rules from Scott Purcell:
New Regulation A+ Crowdfunding Rules

WHEN

Rules become effective in 60 days

Tier 1: requires SEC and state blue sky reviews & fees, raise up to $20M per year, open to
investors, no audit required

WHAT

Tier 2: requires SEC review but no state blue-sky review (preemption), raise up to $50M
open to unaccredited investors (limited to the greater of 10% of income or net worth),
required, must use a registered transfer agent (firms like FundAmericacan help to sim
issuers)

Both - are open to unaccredited investors, can be used by startups as well as existing bu
are exempt from 12(g) registration thresholds

Prepare offering documents

Get audit done
HOW

Use form 8a short-form

Submit draft offering to SEC
File electronically via EDGAR

PROS
Enables to sell to unaccredited investors
Creates tradable security
COMPARISON
WITH RULE 506(C)

Raise higher amounts from the crowd

CONS
Takes more time to launch an offering
More costs in legal fees, accounting costs, and annual reporting obligations

IN FULL DISCLOSURE, SCOTT ANDERSEN AND I RECENTLY FORMED AND ARE PARTNERS IN A
SECURITIES COMPLIANCE CONSULTANCY FOR BROKER-DEALERS, INVESTMENT ADVISERS AND
OTHER FINANCIAL INSTITUTIONS: CONSULTDA.COM.

Note:

This

article

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HedgeCo.Net

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this

link http://www.hedgeco.net/blogs/2015/03/29/why-the-new-regulation-a-rules-will-rock-thecrowdfunding-world-by-david-drake/ on March 29, 2015.

David Drake is an early-stage equity expert and the founder and chairman of New YorkbasedVictoria Global with divisions LDJ Capital, a family office and private equity advisory firm,
and The Soho Loft Media Group - The Voice of Capital Formation a global financial media
company involved in Corporate Communications, Publications, and Conferences. You can reach
him directly atDavid@LDJCapital.com.