On March 25th, 2015, the US Securities and Exchange Commission (SEC) released the final rules for Regulation A+ that expands the existing set of crowdfunding regulations. Regulation A+ was mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act passed in 2012. Today is the first day to file an offering with the SEC under Regulation A+. No doubt, we fully expect to hear about a large number of issuers rushing to claim the title of “first to file” today. The next few months will indicate the true viability of Regulation A+’s impact.
Regulation A+ (considered a “mini-IPO”) increases the offering amount of securities sales to $50 million. The main advantage of Regulation A+ is that it allows anyone to invest (within certain limits), regardless of the investors’ accredited investor status. Most private offerings today utilize Regulation D, which is limited to accredited investors only, meaning only those with more than $200,000 annual income or $1 million in net worth may invest. Accredited investors make up roughly two percent of US households, meaning that startup and small business investment opportunities are limited to a select group of very wealthy individuals.
Under the new Regulation A+, Tier I filings will have no investment limits, while Tier II filings will allow non-accredited investors to invest a maximum of the greater of 10% of their net worth or 10% of their net income per offering.
While there has been much hype about how Regulation A+ will revolutionize and greatly impact the crowd financing market, it remains to be seen whether the new updates, especially on timelines for regulatory approval, will be meaningful. The previous Regulation A was rarely utilized, largely because the regulatory approval process was long and onerous.
It’s unlikely that many issuers will opt to file under Tier I of Regulation A+ given that it still requires state and federal regulatory approval. States must now work together for a more harmonized “coordinated review,” but no one knows quite yet how this coordination will actually work in practice. Likely, Tier II offerings will be more popular, as they need only approval by the SEC, which intends to shorten the approval timeline. We’ll find out over the next few months whether the timeline has significantly improved.
REGULATION A+ AND REAL ESTATE CROWDFUNDING
While Regulation A+ may make a bigger impact on startup and small business investing, it will likely have limited impact on the real estate crowdfunding sector. Real estate developers generally need their financing quickly, and would be reluctant to wait several months to receive it. Additionally, the legal and administrative cost to file a Regulation A+ are still significant, albeit much cheaper than the costs associated with going public. Lastly, real estate peer-to-peer issuers like Patch of Land would be capped at $50 million, which would severely limit its ability to grow exponentially. Currently, Patch of Land issues offerings under Rule 506(c) of Regulation D. While this offering structure limits investments to accredited investors only, Patch of Land is able to file instantaneously, cheaply, and with no cap on offering amount.
Regulation A+ is a step in the right direction. We may see it make a big impact on startup and small business investing. In the real estate crowdfunding sphere, most platforms will likely stick to Regulation D unless and until someone comes up with a particularly clever way to address the aforementioned issues under Regulation A+.
By: Amy Wan, General Counsel of Patch of Land
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