Regulation A is an exemption from registration for public offerings.
Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
In 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allowed private growth-stage companies to raise money from all Americans.
Under Reg. A+, issuers may solicit and accept funds from all investors, both accredited and non-accredited. Under Reg. D, companies may accept funds from accredited investors only (Rule 506C) or up to 35 non-accredited investors (rule 506B) and an unlimited number of accredited investors.
Existing investors may be initially skeptical of a Reg A+ offering simply because it is new and non-traditional. It is important to remember the following details about Mini-IPOs:
- Most companies simply test the waters first to make sure there is sufficient investment interest prior to approaching their board of directors for approval to launch a mini-IPO.
- Reg A+ can be part of a larger round. Companies might decide to raise 70% of their round from venture capitalists and hold back the remainder for their customers/users.
- Mini-IPOs are about more than just fundraising. They are an opportunity for a company to make a large marketing splash and create an army of brand ambassadors.
- Legal and accounting fees can potentially be higher than under a traditional Reg. D raise.
- Regulatory approval prior to closing investments will most likely take 2-3 months.
- More investors (although this can also be a benefit as long as it’s managed appropriately).
- Tier II raises will be subject to ongoing public reporting requirements (although this can be a benefit for companies planning to potentially exit through a full-blown IPO later).
The testing the waters campaign is an opportunity for users (investors) to express their interest while their indications are non-binding. So long as you communicate to your investors that you are just considering a Mini-IPO, they will understand if you decide not to proceed. If you receive less interest than anticipated or decide not to proceed for any other reason, you can easily explain to your investors that you will be raising capital in another way, and/or that they may have other chances to invest in the future.
A testing the waters campaign can also increase customer engagement by giving users a sense of involvement in helping the company make an important decision. Regulation A+ is an opportunity to reward your customers and invite them to share in your financial success, a success they played a key role in creating. By inviting investors to test the waters and offering them the potential opportunity to take a stake in your company, you stand to energize your user base and encourage them to become brand evangelists.
Although there are no upfront fees associated with conducting a testing the waters campaign, founders should work with a reputable broker-dealer platform to ensure they comply with Regulation A+ regulations. Although testing the waters is free, doing the process yourself can be rather costly. Sending the wrong messages to potential investors or not including proper disclosures could effectively eliminate your ability to proceed with a mini-IPO. In summary, find a regulated platform to work with and do your homework on them ahead of time.