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What Investors Need to Know About the SEC’s Regulation A+

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SEC Regulation A+ for InvestorsDid you want to invest in the Facebook IPO in 2011, but were told that you weren’t allowed to? Unfortunately, that’s because the SEC has some strict policies that limit some investing opportunities to “accredited investors.” The good news is that a new set of rules were rolled out as part of the Jumpstart Our Businesses (JOBS) Act, which are known as Regulation A+. These new rules give small investors the chance to invest in certain IPOs. Here is an overview of these changes and what they mean for you.

Implications of These New Changes

President Obama signed the JOBS Act in 2012. Some components of the law were enacted immediately, while others were rolled out over the past couple of years. Regulation A+ is one of the most recent components of the law, which creates new opportunities for non-accredited investors and small float companies.

Many experts have discussed the many benefits that Regulation A+ provides to smaller companies, namely access to equity capital that was previously denied to them under the Securities Act of 1933 and subsequent policy add-ons. Sara Hanks, CEO of CrowdCheck, is one of the experts that feel the new policies are beneficial for startups trying to raise capital on a smaller scale.

“Regulation A is going to be an effective way for early-stage companies to raise funds from a wide variety of investors,” Hanks told Forbes.

While the benefits to early-stage startups are clear, few people have elaborated on the changes for investors. We have reviewed some of the key changes of Regulatory A+ so that investors know what to be prepared for.

Overview of Regulation A+

One of the primary goals of the JOBS Act was to grow existing small businesses and encourage entrepreneurs to launch new startups. One of the solutions is relaxing some of the rules that previously restricted funding opportunities for smaller IPOs. Regulation A+ is the set of rules in the JOBS Act governing how smaller firms can raise capital.

The new rules are a game changer for both small companies and new investors. In addition to relaxing the rules for companies offering IPOs, they also opened the door for smaller investors to participate as well. Before Regulation A+ took effect, investors could only participate if they either had a yearly income of at least $200,000 or a net worth of $1 million.

There are two different set of regulations for companies trying to raise capital under Regulation A+: 

  • Tier 1. These regulations apply to companies trying to raise up to $20 million in a 12-month period.
  • Tier 2. These policies apply to firms trying to raise up to $50 million in a 12-month period.

There are a set of core requirements that all Regulation A+ offerings must comply with. Companies participating in any IPO must report important elements of their business to investors and the SEC when they first file their offering. However, Tier 2 companies are subject to additional regulations, such as:

  • The need to provide audited financial statements to regulators and investors.
  • The need to file reports every six months.
  • A requirement stipulating that they report any major current events.
  • A restriction on the amount of capital they can raise from any individual non-accredited investor.

Both investors and startups need to familiarize themselves with these rules. The restrictions are more lax than previous SEC rules, but there is still some red tape that stakeholders need to be aware of.

How Does Regulation A+ Benefit Investors?

Regulation A+ has given individual investors access to IPO opportunities, which were previously denied to them. However, non-accredited investors may also not be aware of the risks that IPOs entail, so it’s important for them to be well-informed beforehand. Here are some important changes for investors.

Opens the Door for Non-accredited Investors

The biggest change for investors under Regulation A+ is that IPOs are no longer limited to accredited investors. The accredited investor rules were created to protect individual investors that may not have the financial knowledge necessary to make informed decisions. They applied to IPOs, because a limited amount of information was available and the risk of failure was higher.

Regulation A+ has paved the way for investors to participate in IPOs more easily. However, there are still some restrictions in place to protect them. One of the most important provisions is a requirement that prohibits non-accredited investors from investing more than 10% of their net worth or annual income.

Opportunity to Invest in Early-Stage Startups

The new rules also allow investors the opportunity to participate in IPOs of much smaller companies. According to PwC, the average company that launches an IPO incurs $3.7 million in filing costs.

These costs used to be a huge barrier for many small companies that were trying to raise capital. They had the option to file for an IPO under a different set of rules that were called Regulation D, but these policies have very strict limitations on accepting capital from non-accredited investors. Regulation A+ makes it much easier for them to raise the capital that they need without onerous restrictions on the type of investors they can work with.

Tanya Prive, co-founder and CEO of Onevest, states that companies can raise capital under Regulation A+ for as little as $85,000, which makes it a much more viable alternative. Since the new regulations open the door for many new businesses to participate in an IPO, they expand the opportunities for anyone interested in investing in an IPO. Newer tech companies or companies serving a particularly narrow market may benefit from the new rules. International Business Times recently published a list of the following companies that may participate:

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  • Elio Motors – a company that plans to sell three-wheeled two seat vehicles on the market in 2016.
  • Xreal – a mobile game developer that is already listed on Start Engine, a new crowdfunding platform.
  • Virtuix – another game developer that specializes in virtual reality games. Virtuix has created an account on SeedInvest to raise capital.
  • DietBet – a social networking community for people trying to lose weight.
  • StarShop – an e-commerce mobile app developer that was founded by serial entrepreneur and Shark Tank Host Kevin Harrington.

These types of investments can be attractive opportunities for investors. According to a study by three leading business school professors, the average returns on small float IPOs are over 20% higher over the long-term.

Opportunity to Bypass Traditional Brokers

Crowdfunding is becoming a powerful way for new ventures to raise capital. However, until Regulation A+ was passed, companies couldn’t use crowdfunding sites to sell equity. The SEC had shut down and a few other crowdfunding sites that violated this restriction. was relaunched, but it had to refrain from operating with U.S. companies or investors. Now that the SEC has loosened the restrictions on smaller IPOs and non-accredited investors, investors will be able to use crowdfunding sites in lieu of traditional brokers.

John Torrens, a contributor at the Wall Street Journal and Ryan Caldbeck, the founder and CEO of CircleUp, have both discussed some of the primary benefits of crowdfunding. They argue that crowdfunding sites are more cost-efficient and open the door for investors that want to buy equity in industries that are not usually available through VC firms.

What Risks Does Regulation A+ Carry for Investors?

While Regulation A+ creates many opportunities for investors, there are also some risks that investors need to be prepared for. One of the biggest criticisms of Regulation A+ is that it allows companies subject to Tier II requirements to bypass the review process of state regulators, which is supposed to be one of the most important safeguards for investors. The North American Securities Administrators Association warns that this could pave the way for all kinds of investment fraud.

“State-level review will help the Commission root out fraud and abuse in this new marketplace and will give investors confidence that securities sold in these offerings are subject to an adequate level of scrutiny,” the NASAA wrote to the SEC.

Another major concern that investors need to be aware of is the lack of liquidity. Smaller companies need a stable supply of cash to operate effectively, which means that they don’t want to have a large number of small investors selling their shares on a whim. Therefore, investors need to be willing to hold their investment for the long-term.

This means that you may not have much recourse if the company doesn’t perform well. Investors will need to do their due diligence and think very carefully before committing to an investment.

Another major concern with Regulation A+ is that it could lead to more fraud. Since equity-based crowdfunding campaigns were illegal prior to the new rules, investors weren’t aware of many companies trying to offer such opportunities. Now that Regulation A+ has taken effect, a number of new small-scale IPOs could be launched in the near future.

As these IPOs become more common, scam artists and unscrupulous crowdfunding companies may try to capitalize off of the hype and sell dubious opportunities to unwitting investors. As companies like prove, crowdfunding sites are very easy to set up and it can take a long time for them to gain the attention of the SEC. Investors must be diligent about authenticating every crowdfunding provider or company before investing.

Upcoming Changes for Regulation A+

The framework of Regulation A+ enables smaller startups to solicit funding to grow their businesses. However, some companies are still barred from raising the necessary money for one of two reasons:

  • They lack the funding to pay the filing fees, even though they are much cheaper than traditional IPOs.
  • They don’t have the financial data needed to meet the financial reporting and auditing requirements.

The SEC recognizes that some viable startups are still left out, so they are in the process of drafting a separate set of rules known as Tier III. These rules would open the door for newer startups to raise capital. The new rules could take effect in October 2015. However, since the SEC delayed implementation of the rest of Regulation A+, it’s possible that they will be behind schedule rolling out the remaining portions of the law.

Corbin Holt, the director of marketing for Crowdfunder, states that the expanded regulations would present more opportunities for non-accredited investors and startups.  “The details for Title III aren’t hammered out yet, but we are hoping for something that is more accessible to seed- and Series-A-type companies,” Holt says, “allowing them to take in investment from non-accredited investors and effectively open up much more access to capital. My biggest takeaway: The SEC is definitely open to this, and you can say they are testing the waters with Regulation A+, ramping up to nailing Title III and making it workable for companies.”

How Regulation A+ Can Change Your Approach to Investing

Since its formation in 1934, the SEC has created a lot of policies to try to protect investors from making bad decisions. While some of these ideas have merit, they have also been a bit too strict in recent years, because investors should have the opportunity to make informed decisions on their own without the government’s permission. Also, the SEC and other financial regulators haven’t really proven their value since they failed to stop the problems that led up to the last financial crash.

The implementation of Regulation A+ gives small investors more freedom to participate in IPOs, which can offer very high returns. However, they need to accept that investing in these IPOs is more risky than traditional asset classes, so they need to do their research before getting started. Here are some tips that non-accredited investors should follow before buying equity on a crowd-funding site or other platform:

  • Verify that the platform and all participating companies are vetted and regulated by the SEC.
  • Carefully review the financial records of any Tier II company.
  • Objectively study the business model of any company that doesn’t have a clear track record of profitable growth. Many people buy into business opportunities based on the hype they generate, but they don’t always pan out as well as expected.

Since companies raising capital under Regulation A+ aren’t subject to the same disclosure requirements as other publicly traded firms, you need to dig deeper to do your research. As long as you do your due diligence, you can make an informed decision.

What are your thoughts about Regulation A+? Do you think it provides a lot of new opportunities for investors? Feel free to share your comments in the form below.


1 Comment
  1. DianaVerducci says

    It’s all about getting more flexibility as an individual investor. Always pay attention to the risks and do research before jumping in. Tough part about the law is that it changes from administration to administration. Hard to predict the next big tweak.
    -from DianaV

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