There has been very little attention drawn to Title IV of the JOBS Act which, as proposed, would raise the Reg A threshold to $50 million and exempt these offerings from state blue sky laws.
With the SEC comment period for Title IV nearing its end, I sat down with Sam Guzik, Of Counsel to the law firm of Richardson Patel LLP and thought leader in the crowdfinance industry, to discuss how “Crowdfunding Plus”, a new structure for raising capital utilizing Reg A in tandem with crowdfund principles, could potentially transform the small cap equity markets.
NowStreet Wire: The SEC issued proposed regulations for Regulation A+, Title IV of the JOBS Act, on December 18, 2014. What were some of the things that surprised you the most about the proposed regulations?
Sam Guzik: Well, there was a lot to chew on in the 300+ page release. Probably the biggest surprise was that the SEC came out with proposed rules when they did. Title IV of the JOBS Act was the only part of the JOBS Act dependent on SEC rulemaking which did not have any deadline set for the SEC to issue rules. Given the nine month delay in Title III crowdfunding rules, and the enormous backlog of Dodd Frank rulemaking going back to 2010, the proposed Regulation A+ rules came as a welcome surprise.
As far as the content of the proposed rules, the biggest surprise, in a very positive way, was the position the SEC has taken on blue sky pre-emption for offerings between $5 million and $50 million (so-called Tier 2 offerings). Essentially, it has taken the position that all investors in a Tier 2 offering, both accredited and unaccredited, are “qualified purchasers” – effectively meaning that a company can open up its offering to all investors in a Tier 2 offering and still be exempt from state blue sky review.
The other surprise also involved blue sky pre-emption. For Tier 1 offerings (capped at $5 million) the SEC has requested comment on whether Tier 1 should also be pre-empted from all blue sky review. The issue of pre-empting blue sky review for raises below $5 million, the original ceiling for “old” Regulation A, was never directly addressed by Congress in the JOBS Act – the focus of Congress was on pushing the ceiling up to $50 million and allowing for blue sky pre-emption for the higher amounts – but adding in ongoing reporting requirements.
NowStreet Wire: What do you expect will be the biggest unknowns faced by companies under the Regulation A+ rules, in their proposed form?
Sam Guzik: Regulation A+ has huge potential for revitalizing the smaller IPO market — provided it operates as promised — a disclosure regime which is lighter than required by fully reporting companies, and a “streamlined” SEC registration review process. A big unknown, regardless of how final rules look, is what we can expect from the SEC in the Regulation A+ review process when the new regulations go live. Statistics I have seen indicate that under the original, rarely used Regulation A, which allowed raises up to $5 million, average time spent in registration at the SEC was about nine months. Some of this may have been a function of lower quality filings by lower tier companies, and the low priority that these offerings may have had at the SEC.
My sense from both public statements by the Commission and the overall tenor of the proposed rules is that the SEC is expecting the new Regulation A+ to be a robust method of funding. My expectation, therefore, is that with proper representation by SEC disclosure counsel and what appears to be strong SEC support for this new $50 million exemption, issuers can reasonably expect Regulation A+ to ultimately perform as advertised – as a streamlined mini-IPO.
Another area of practical concern – the “light” ongoing reporting requirement for Tier 2 (semi- annual versus quarterly), versus full reporting, only remains in effect until a company exceeds the caps currently set for the number of total shareholders – 500 unaccredited investors, or 2,000 accredited investors. Unless the SEC modifies its proposed rules, companies will face difficulties including a significant number of persons who wish to invest smaller amounts of money – those more likely to be unaccredited investors. This defeats one of the purposes of Regulation A+ - allowing a company to do a mini-IPO by going out to a large group of investors.
Do the math: 500 unaccredited investors, each investing an average of $10,000 – that’s $5 million to the company – and they have already hit the 500 shareholder cap. And that’s on the low end of an exemption available for up to $50 million. Something needs to give here.
NowStreet Wire: Tier 2 offerings seem like they could become very popular, depending upon what the SEC does with the final rules. What about Tier 1? It was hardly used in the past. Do you think there is a future for Tier 1 offerings?
Sam Guzik: That depends on a few things, initially in the hands of the SEC, and perhaps ultimately Congress. Tier 1 offerings cannot be competitive with other alternatives unless and until blue sky regulations are pre-empted. The SEC has asked for comment on this, so presumably they believe they have the power to do this through rulemaking.
The second thing the SEC needs to do, in final rulemaking, is raise the ceiling on Tier 1 offerings, from $5 million, to perhaps $10 million. It starts to look more attractive as the ceiling goes up.
And finally, as with Tier 2 offerings, the limit on the number of shareholders before full reporting requirements are triggered ought to be modified.
NowStreet Wire: Do you see lower dollar Tier 1 offerings as a useful crowdfunding type vehicle?
Sam Guzik: This is actually one of the more interesting, and overlooked areas where Tier 1 offerings could become very popular in the future. If the SEC were to exempt Tier 1 offerings from blue sky regulations, and modify the shareholder caps, both of which were already done by Congress in Title III of the JOBS Act, you have the potential for investment crowdfunding on steroids, or what I call “Crowdfunding Plus.” You take all of that complex disclosure in Title III and move it to a place where you can raise much higher dollar amounts – actually, the disclosure is in some respects less complex – since audited financials are not required – only “reviewed” financials. The negative would be the SEC registration and review process, absent from Title III. But raising higher dollar amounts moves the cost-benefit needle from dismal (Title III) to doable (Title IV). And the time spent in registration may actually work to a crowdfunding company’s advantage, allowing time to generate sufficient momentum to be able to close the offering.
Learn more about “Crowdfunding Plus” and obtain valuable insight regarding a potential JOBS Act 2.0 on NowStreet Wire’s free webinar, Reviving Capital Formation with Reg A Crowdfunding, where Sam Guzik will be joined by Congressman Patrick McHenry, key sponsor of the JOBS Act, and David Feldman, partner at Richardson Patel and one of the country's leading experts on alternatives to traditional initial public offerings.
Samuel S. Guzik, a corporate and securities attorney with more than 35 years in private practice, is Of Counsel to the law firm of Richardson Patel LLP, in Los Angeles and New York, a nationally recognized corporate and securities law firm. Mr. Guzik is a recognized authority and thought leader on the JOBS Act of 2012, including ongoing SEC rulemaking. He is a regular speaker and prolific writer on federal securities matters, and his articles have been frequently cited in national financial publications. In 2014 he has had two articles accepted for publication by The Harvard Law School Forum on Corporate Governance and Financial Regulation, addressing current JOBS Act rulemaking under Title III and Title IV of the JOBS Act, which features regular posts by SEC Commissioners.
Dara Albright is Editor in Chief of NowStreet Wire, A Crowdnetic Company and Co-Founder of LendIt, the preeminent global conference organization dedicated exclusively to the P2P and online lending industry.
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