Regulation A: what just happened?

Good lord, there is a lot of nonsense being written about revised Regulation A, which went into effect this morning.

People are saying the SEC has opened up investment to a whole new class of investors and companies. People are saying that companies were never able to publicly solicit from non-accredited investors before. People are saying that now you don’t have to know your investors personally, like you did before.

Folks, most of this is sheer nonsense. Regulation A has been around since 1936. Under Regulation A you have always been able to make public offers to non-accredited investors. Under Regulation A you’ve also been able to “test the waters”, that is, see if there might be any interest in your offering, for decades. The SEC hasn’t opened up access to a whole new class of investors, because that class of investors has always been there, waiting to have interesting ideas pitched to them by small and emerging companies.

It’s the companies who haven’t been showing up in this market. Back in 1996, Congress “preempted” state regulation of offerings that were registered with the SEC (like IPOs) and offerings made under the private placement rules (like Rule 506 offerings made to accredited investors). Poor Regulation A was not included in these amendments, and so offerings under Regulation A had to go through the review process at the state, as well as the federal level. Understandably, especially when you consider that offerings under Regulation A were limited to $5 million in size, companies decided to use other options, and Regulation A became little-used.

Today, it becomes a viable option for capital-raising for early-stage companies. Tier 2 of Regulation A permits companies to raise up to $50 million from all sorts of investors, in offerings reviewed only by the SEC and not the states. Tier 2 also comes with the extensive ability to test the waters to see whether there’s enough investor interest to warrant engaging lawyers and accountants.

I love Regulation A. It’s well-written and easy to comply with. It may tempt companies back to a market they abandoned years ago. But it’s a revival of a neglected market, not the creation of a new one.

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