In our last update concerning Regulation A, we discussed the SEC’s revamp of Regulation A, referred to as Regulation A+. Regulation A was originally intended to act as a middle ground between private placement offerings and registered public offerings. However, Regulation A was rarely used due to the high cost of compliance relative to the amount of capital that could be raised under it. Instead, most issuers gravitated towards private placement under Rule 506 of Regulation D, which permits an unlimited amount of capital to be raised with relative ease.
Regulation A+ allows issuers to raise up to $50 million, compared to a $5 million cap under the original framework. Regulation A+ went live on June 19, 2015, and last month the SEC released a report summarizing the impact of Regulation A+ during the first 16 months (June 19, 2015 through October 31, 2016) since the amendments became effective. Although it is too early to draw any long-term conclusions from the SEC’s report, Regulation A+ appears to be a much more popular offering than its predecessor.
To recap, Regulation A+ is divided into two tiers. Tier 1 Offerings allow issuers to raise up to $20 million during any 12-month period, subject to SEC and state regulatory authority review. Tier 2 Offerings allow issuers to raise up to $50 million during any 12-month period, subject to SEC review. While offerings in both tiers require an extensive review process, Tier 2 offerings are subject to additional requirements, including providing audited financials; filing annual, semiannual, and current event reports; and a cap on sales to non-accredited investors (no more than 10% of the greater of the investor’s annual income or net worth).
For the purposes of this post, offerings that have been submitted to the SEC and/or state regulatory authority are considered “Filed.” Offerings that have completed SEC and/or state regulatory authority review and are approved to solicit and sell to the public are considered “Qualified.” These are the major takeaways from the first 16 months of Regulation A+:
- There were 147 filings seeking up to of $2.6 billion in financing. Issuers filed 72 Tier 1 Offerings, and 75 Tier 2 Offerings. Tier 1 Offerings accounted for $700 million in the total offering amount, while Tier 2 Offerings constituted the remaining $1.9 billion.
- Of those 147 filings, the SEC and/or state regulatory authority qualified a total of 81 offerings seeking up to $1.5 billion. The SEC and state regulatory authorities qualified 33 Tier 1 Offerings, and the SEC qualified 48 Tier 2 Offerings.
- The average and median offering amount for Tier 1 Offerings was $10 million and $6 million, respectively. The average and median offering amount for Tier 2 Offerings was $26 million and $20 million, respectively.
Characteristics of the Offerings
- Issuers offered equity (as opposed to debt or other types of securities) in 87% of all offerings.
- Only 10% of all qualified offerings (None in Tier 1 and 17% in Tier 2) utilized an underwriter, and only 36% of all qualified offerings (18% in Tier 1 and 48% in Tier 2) utilized an intermediary.
- The median number of states in a Tier 1 offering was 4, and the median number of states in a Tier 2 offering was 50.
- Approximately 10% of all qualified offerings involved sales by existing and affiliate (a person who directly or indirectly controls the issuer i.e. executive officer, director, or a substantial shareholder) shareholders.
- The median and average number of days it took the SEC and state regulatory authorities to qualify a Tier 1 offering was 68 and 93 days, respectively. The median and average number of days it took the SEC to qualify a Tier 2 offering was 104 and 121 days, respectively.
Characteristics of the Issuer
- The median total assets for qualified Tier 1 and Tier 2 Offerings was $100k and $200k, respectively. The average total assets for qualified Tier 1 Offerings was $104.7 million and $61.9 for qualified Tier 2 Offerings.
- 62% of all issuers with qualified offerings (61% Tier 1 and 64% Tier 2) had no revenues. All Tier 1 issuers and 89% of Tier 2 issuers had revenues of less than $1 million.
- Issuers with qualified offerings had a median of 3 employees and an average of 29 employees.
- 37% of all issuers were in finance, insurance, and real estate, 27% were in other business services, and 22% operated in Manufacturing.
- California led the way with 36% of all offerings, followed by Florida and Texas at 14% and 10%, respectively.
An immediate takeaway from this data is that Regulation A+ appears to be more popular than its predecessor. In the 12 months prior to the enactment of Regulation A+ (June 19, 2014 through June 18, 2015), there were approximately 51 Regulation A filings seeking to raise approximately $159 million. Adjusting for the length of the SEC’s study, one would expect a 16-month period to include approximately 70 filings seeking around $218 million. Instead, over the last 16 months we saw a two-fold increase in projected filings, and an almost $2.4 billion increase in offering amount.
From this data, we can also see that Tier 2 offerings were qualified at a higher rate (64% vs. 46% for Tier 1), but took longer to qualify on average than Tier 1 Offerings (121 days vs. 93 days). The study does not provide insight into what could cause this discrepancy between tiers. The discrepancy could be purely due to timing issues in the study or it could have another underlying cause; it will be interesting to measure these factors as Regulation A+ matures as an offering option.
This information also demonstrates the speculative nature of Regulation A+ offerings thus far. The clear majority of issuers offered equity instead of debt, presumably to avoid short-term expense obligations. Also, relatively few issuers utilized an underwriter or intermediary, apart from 48% of Tier 2 offerors that used an intermediary. This is understandable given the fact that most of the issuers have relatively few assets, a limited amount of debt, little to no revenues, and a small number of employees. Although this data shows the speculative downside of Regulation A+ (90% of all offerings were sold on a best effort basis), it also shows a major advantage of utilizing Regulation A+: small, startup companies with promising futures can raise up to $50 million without having to incur the costs and obligations of retaining an underwriter or intermediary, not to mention the avoided regulatory burden.
It is too early to determine whether Regulation A+ will be a success. Tier 1 and Tier 2 Offerings are only obligated to provide complete information about sales after the termination or completion of an offering. Of the available information, the SEC estimates that 20 issuers have raised approximately a combined $190 million, and 11 issuers have reported zero proceeds. Due to reporting time frames, these numbers are likely substantially understated. We will keep you posted on future updates regarding Regulation A+.
Feel free to reach out to us if you have any question or if you think that Regulation A+ could be a viable option for your investment offering.