Small companies looking to raise millions of dollars from outside investors may now have a much easier time, thanks to new federal rules.
The Securities and Exchange Commission recently finalized rules that will allow small companies to raise up to $50 million in a public offering. The rules, which take effect in May, are an amended version of the SEC’s Regulation A rules and were mandated as part of the Jumpstart Our Business Startups Act (JOBS) Act passed by Congress in 2012.
The old Regulation A rules required that companies go through a costly and timely state-by-state review process while only allowing them to raise up to $5 million. The new rules—dubbed “Regulation A+”—allow companies to raise up to $50 million and avoid the need to register with regulators in all 50 states.
Hardly any company has "used Reg A up until now because of the state-by-state compliance requirements,” says Kendall Almerico, a Washington, D.C.-based lawyer who specializes in crowdfunding. Moreover, the new rules allow companies to raise money from an unlimited number of both “accredited” investors—those with more than $200,000 in the previous two years or at least $1 million in assets—and non-accredited investors, Almerico points out. The old Reg A rules greatly limited the number of non-accredited investors that a company could raise money from.
Almerico claims the new rules will be especially beneficial to growing companies who want to raise more than a few million dollars but don’t want to spend the money and time jumping through all the state-by-state compliance rule hoops. It will now likely cost a company $50,000 to $75,000 to prepare for a “mini” public offering, compared to the “hundreds of thousands of dollars” it would have cost before due to the state regulatory hurdles.
While the new SEC Regulation A rules are a big step, the SEC has yet to put out final rules for equity crowdfunding—another funding provision aimed at small businesses and startups that came out of the JOBS Act. That rule should allow small companies to raise up to $1 million via crowdfunding. The crowdfunding rules could have even bigger effects on many small companies, because it will allow them to raise money from unaccredited investors while remaining private companies, Almerico adds.
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