The short answer: They don’t. The new regulations provide another avenue for private equity funding.
On March 25, 2015, the Securities and Exchange Commission (SEC) unanimously voted to amend existing Regulation A to increase the amount of capital that issuers (which has a legal meaning under the Securities and Exchange Act) can raise private equity under the regulations. They also updated the forms, filing and delivery requirements but that’s less sexy than the actual increase in the amount of capital. So the question is: With these new regulations, is it better for issuers to raise money under the new Regulation A+ or stick with Georgia’s own Invest Georgia Exemption (IGE)? Well—it depends. (As a lawyer, you knew that answer was coming.)
As you may know, registering with the SEC can not only be time consuming but expensive. Therefore, the SEC allows for “issuers” to file an exemption to registering with the SEC and avoid continuous and arduous reporting requirements that you see many public companies having to comply with on a monthly, quarterly and annual basis (and let’s not forget the 8-K filing if something REALLY special happens.) Issuers can file exemptions under three (3) Regulation D rules, each with a different set of rules for qualifying under the particular rule, and the less known and talked about Regulation A. Finding an exemption to registration with the SEC saves time, money and headaches.
Under Regulation A, issuers file a shortened version of offering materials with the SEC. Under new “Regulation A+”, as the newly amended Regulation A is called, issuers will be able to raise up to $20M during any 12 month period in a tier 1 offering or up to $50M in any 12 month period in a tier 2 offering. Additionally, the new regulations preempt state securities law registration and qualifications for securities sold in a Tier 2 Regulation A+ offering. Previously, offerings under Regulation A were limited to $5M and the securities offered were not exempt from state blue sky laws.
Under the Invest Georgia Exemption (“IGE”), the state of Georgia has opted to use a provision of the Securities Exchange Act of 1933, related to initial offerings, to create intrastate offerings—meaning offerings of securities sold within a state—in order to create more opportunities for issuers to raise capital within a state. There are restraints on this however which are discussed below.
I believe one of the reasons Congress carved out so many exemptions to registration with the SEC, including the ability for states to create rules to be exempt under the Securities Act of 1933, is to offer a variety of ways to issuers to raise capital without the onerous responsibility of reporting to the SEC. So it really depends on the objectives of the issuer which is best: Regulation A+ or IGE. Here are some major differences in the two.
- The amount of capital that can be raised. Under IGE, issuers can only raise up to $1M in a 12 month period with a cap of $2M for the entire offering. Under Reg A+, the new rules permit up to $20M (Tier 1 offerings) and up to $50M (Tier 2 offerings). Additionally under Reg A+, sales are limited to 30% of the aggregate offering amount raised in a 12 month period. Yeah—good luck with that math.
- The amount of paperwork that must be filed. Under IGE, a notice must be filed with the Secretary of State within 21 days of the first offer. The notice is minimal and there are minimal future reporting requirements. Under Reg A+, while there is not the same amount of paperwork as regular registration with the SEC, there are still ongoing disclosure requirements that can cost time and money.
- The amount of legal compliance with levels of government. Under IGE, there is no dual filing of paperwork with the SEC since Georgia is using an exemption to SEC oversight. However, under new Reg A+ rules, there is exemption to complying with state blue sky laws for securities but only for securities sold in a Tier 2 Regulation A+ offering.
- The amount of flexibility in fulfilling the purpose of the law. Under IGE, there is the ability for the Secretary of State through its agency power or the Georgia legislature (of which I happen to be a Member) to draft rules and regulations around IGE. For example, this legislative session I proposed legislation that would have given “non-accredited” investors the same tax credit “accredited” investors currently receive for IGE investments through a fund that was set up by the Georgia General Assembly in 2011 to help with private equity financing. Under Reg A+, a similar piece of legislation would have to go through Congress—and we all know how much fun THAT would be.
So to go back to my original answer to the question of which is better—-It REALLY does depend. Make sure that you are communicating with your investors, financial advisors and, of course, corporate in house counsel to make sure that you find the best way for you to raise capital for your business. As always, we are here to help.