BREAKING NEWS: Starting this month, companies that seek to raise up to $50 million have a new financing option that will give some private businesses access to a wider pool of potential investors.
Regulation A+ allows companies to hold a “mini I.P.O.” to raise up to $50 million in any 12-month period from the general public, not just from accredited investors. While this new law has the potential to be a real game-changer for the way businesses are funded, it remains to be seen whether the rewards of raising money this way will outweigh the hassle and expense for the startups and small businesses that the law was designed to benefit.
Previously, under the little-used Regulation A, companies could raise up to $5 million in a public offering. Now Regulation A+, introduced as a part of the 2012 JOBS Act, will enable companies to raise up to $50 million from the general public in any 12-month period, while eliminating some of Regulation A’s burdensome registration requirements such as the rule that offerings be registered in each state in which they were sold.
The goal of Regulation A+ is to allow promising companies, which are typically backed by venture capitalists or wealthy angel investors, to instead raise money by selling equity stakes to investors of more modest means. These “mini I.P.O.s” will allow businesses to advertise their offerings on websites and through social media, giving ordinary investors an opportunity to buy shares in companies that are not yet (or may never become) publicly traded.
However, before you attempt to launch your own “mini I.P.O.”, you should be aware that the new rules are still very complex. In fact, complying with the rules of this new fund-raising technique is so costly and complicated that few high-quality companies may actually bother to use it. Those that do can anticipate spending approximately $100,000 or more in legal, accounting, and marketing fees to file paperwork with the SEC just to start the process of a Regulation A+ “mini I.P.O.”
The advantage of going public is to provide capital for startups and other growing firms that need to scale faster than earnings and debt can take them. However, going public makes the business founder beholden to shareholders, whose influence can be constricting.
If a business was already inclined to go public, these new rules will provide more flexibility. However, in actual practice this process may only help a very small percentage of growing businesses. The rest may find other sources of capital more appealing. Therefore, in an environment where private investors and venture capitalists are eager to invest in high quality companies, a “mini I.P.O.” might not always be the best way to go.