How Reg A+ and Reg D are Helping Small Businesses

As the primary source of new jobs and employment, our economy’s success relies heavily on the success of small businesses. Access to capital is critical to the advancement of any business. However, raising capital is one of the most difficult aspects of business for any small company. Congress and the Securities and Exchange Commission (SEC) recognize that there is a tension between providing access to capital for small businesses and the burdens that securities regulations impose on small companies. To somewhat harmonize these two tensions, Congress has given the SEC permission to pass regulations that make it easier for small businesses to raise capital. 

Two exemptions that are helping small businesses by providing easier access to capital are Regulation D (“Reg. D”) and Regulation A+ (“Reg. A” or “Reg. A+”) of the Securities Act of 1933 (“Securities Act”). 

But before we delve into the specifics of how these exemptions are helping small businesses, let’s review what each of these exemptions are.

A Brief Review of Reg. A+.  

“Regulation A+” is how most people refer to Regulation A of the Securities Act, following its amendment in 2012. These amendments, which became effective in 2015, were required by the Jumpstart Our Business Startups Act (“JOBS Act”), which was passed in 2012. Although it can be confusing to have the same law referred to by two different names, there is only one law — Regulation A — and the use of “Reg. A+” is meant to refer to the law as amended, and not its original form. The terms “Reg. A” or “Reg. A+” can be, and often are, used interchangeably. 

Regulation A provides an exemption from registering securities with the SEC. This exemption allows companies to make smaller public offerings with commensurately fewer disclosures and less regulation. However, before it was amended in 2012 (to Reg. A+), the exemption was rarely used by small companies — mostly because, as originally written, it required issuers to get state approval under the “Blue Sky Laws” for their offerings in every state in which an offering was made. Because this was an expensive and time-consuming process, for most small companies it simply was not worth it just to raise the $5 million the law allowed. When the JOBS Act was passed, however, it amended Regulation A to do away with the “Blue Sky Laws” requirement and raised the amount that could be raised to $20 or $50 million — depending on which tier (Tier 1 or Tier II) of the law is being used.

Regulation A+ creates 2 tiers of offerings: Tier 1 and Tier 2.

In addition to other limits and legal requirements, under Tier 1, a company can raise up to $20 million in a twelve-month period, but it has to comply with the Blue Sky Laws for each state in which the offering is made.

Similarly, Tier 2 allows a capital raise of up to $50 million in a twelve-month period, without having to register with the Blue Sky Laws, however, there are limits on how much someone can invest in a Tier 2 offering if that offering is not going to be listed on a national securities exchange. 

With the increase in how much capital a small business can raise and the easing of the Blue Sky registration requirements, Reg. A+ “can be thought of as an alternative to a small registered IPO.”

Finally, securities under Reg. A+ may not be sold until after the SEC has issued a “notice of qualification” qualifying the securities to be sold.

A Brief Overview of Regulation D.

Regulation D (“Reg. D”) of the Securities Act provides an exemption that allows companies to raise capital through the sale of equity or debt securities without having to register those securities with the SEC. Regulation D is composed of several separate rules — Rules 504*, 505*, and 506. Each one of these rules has its specific requirements that an issuer must meet to qualify for that particular exemption. (*Rule 505 was repealed, and any remaining provisions have been folded into Rule 504. *Rule 504 is infrequently used and applies to very specific circumstances, thus is not relevant to this discussion.) 

When Reg. D was amended in 2012 in accordance with the mandates of the JOBS Act, it created two subparts of Rule 506 — 506(b) and 506(c). 

Rule 506(b) allows issuers to:

• raise unlimited capital from an unlimited number of accredited investors and 

• 35 or fewer non-accredited investors.

However, under 506(b):

• an issuer may not advertise or generally solicit its offerings, and 

• any securities sold under Rule 506(b) are restricted securities.

In contrast, Rule 506(c) allows issuers to advertise or generally solicit their offers, but:

• all investors must be accredited investors, and

• the issuer must take “reasonable steps” to verify the accredited status of each investor, and 

• all other restrictions in Reg. D must be met.

Companies using Rule 506(b) or (c) do not have to register their offerings with the SEC, but they must file a Form D with the SEC.

Now that we have a basic understanding of the regulatory exemptions, let’s see how Reg. A+ and Reg. D are helping small companies economically. 

How Reg. A+ and Reg. D are Helping Small Companies Economically.

The purpose of both regulatory exemptions is to make it easier for small businesses to raise capital. Under Reg. A+, issuers can raise capital from accredited and non-accredited investors. This enlarges the pool of investors available to smaller companies. Reg A+ is also like a faster and less expensive “miniature IPO” — allowing companies to raise up to $75 million without having to deal with the complex and time-consuming SEC registration requirements. 

In addition, Reg. A+ allows issuers to “test the waters” for an offering by letting them advertise the offering publicly to solicit interest before officially launching their offering. This can be very helpful in allowing an issuer to determine whether to ultimately proceed with the offer or not.  

Meanwhile, Reg. D gives issuers flexibility in determining how to structure their offering. Under Reg. D, issuers can raise money from accredited investors only (Rule 506(c)), or from accredited and 35 non-accredited investors (Rule 506(b)). Reg. D also provides offering amounts.   

Because they serve different purposes, Reg. A+ and Reg. D can be used at different stages of a company’s life. For example, Reg. D can be used to do an initial capital raise to attract investors, while Reg. A + can be used later in the life of a startup to allow that company to scale.

Exempt offerings are vital to fostering a robust economy. By lowering the barriers to entry, Reg. A+ and Reg. D lowers the costs of business for many smaller companies and they make it easier for smaller businesses to raise capital. This supports innovation, jobs, and the economy as a whole. Moreover, because both exemptions provide relief from the SEC registration requirements, they help small companies save money by providing an alternative to the expensive process of going public.  

These key exemptions have allowed companies to raise more private capital annually than is raised through public offerings — creating more jobs and bolstering the economy. But, as always, they can have their drawbacks as well, and they do have specific limitations. There is plenty more to know and understand about this topic, so be sure to do your own research and consult experienced professionals. 

Reg. A+ and Reg. D are helping the economy by assisting small companies and startups raise capital and reach more investors. While in some instances the law allows the participation of non-accredited investors in an offering, other requirements demand that all investors be accredited. In these instances, it is essential that issuers verify the accredited status of every investor participating in an offering. Taking on the task of verifying every single investor in-house can be daunting. 

VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our accredited investor verification services, (which also include qualified purchaser, qualified client verification, and AML/KYC), are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.