Now that the smoke has cleared after the Regulation A+ announcement, we’re beginning to get a better understanding of the impacts it will have on alt-finance.
JOBS Act expert and crowdfunding attorney Kendall Almerico is a frequent speaker at industry events and is the co-founder and CEO of Fundhub, a leading industry platform for both companies and investors.
Mr. Almerico spent some time with Bankless Times shortly after the Regulation A+ announcement to share his thoughts on their format and potential impact.
Mr. Almerico, while not surprised at the $50-million limit for Tier II, thought there could have been a higher cap. The most optimistic industry watchers were hoping for a cap as high as $150 million, he said, which would have allowed larger companies to participate.
Do not be surprised if the limit eventually gets there. Mr. Almerico said there is nothing to prevent Congress and the SEC from making it bigger should they choose, and given Regulation A+ will be reviewed every two years, there will be plenty of adjustment opportunities.
The SEC had to strike a balance between allowing convenient access to capital and adequate investor protections and Mr. Almerico thinks they created an environment where both sides will be happy.
By capping investor participation to 10 percent of their annual income or net worth, Grandma isn’t getting fleeced, he said. When you consider some of the other investment options available to Grandma, Regulation A+ has much closer oversight. Additional protections include the “pump and dump” prevention measure of limiting selling security holders to 30 percent of all offerings within the first 12 months, and a 48-hour window to prevent pressure sales tactics.
Beneath some of the Regulation A+ criticism is the sentiment investors are at risk from opaque companies who do not provide the information required for investors to make informed decisions.
“There are plenty of disclosure requirements,” Mr. Almerico said. “You have to provide two years of audited records under certain principles. A lot of things have to go into the public record in order for you to sell this investment.”
Good riddance to the state-by-state registration requirements which Mr. Almerico said made Regulation A unusable.
With a $5 million limit and every state having a blue sky law, you had to register in every state you wanted to sell in and spend a small fortune to do so. With the option of having a private Regulation D offering with no cap, it was little wonder why the person in charge of Regulation A paperwork at the SEC was lonelier than the Maytag repairman.
Tumbleweeds may also blow through the office of Tier I, which Mr. Almerico says “basically takes the old Regulation A and raises the limit to $20 million.” A company still has to register with each state and there are different requirements that will drive people to Tier II regardless of the amount they wish to raise.
Things look a little different at the state level, Mr. Almerico said. Basic forms still need to be filed in some states and states can still regulate fraud (which the SEC is encouraging them to do), but what they cannot do is take a fee for paperwork, he added.
The North American Securities Administrators Association (NASAA) was one group opposed to Regulation A+, Mr. Almerico said. They wanted to keep state exemptions while the SEC wanted to get rid of them, so NASAA came up with a compromise: a multi-state filing system where a company can apply in one location and have it disseminated to all 50 states.
There’s a hitch, however.
“It’s a brilliant idea if they could actually get it to work,” Mr. Almerico said.
“The problem is you have to get 50 states to agree on what gets filed and they haven’t done it yet. The SEC gave them plenty of time and if they had done it they would have made it part of the system. Ultimately if they do the SEC may add it as a requirement.”
(NASAA did not respond to a request for comment on the system.)
Whatever system NASAA eventually comes up with, they would be wise to invest in and then continually refine the technology they employ, because the embracing of technology is one of the areas of Regulation A+ that impresses people who will work with it every day (such as Kendall Almerico).
“I’m thrilled,” he said. “Regulation A was developed in the 1930’s when there was no EDGAR. Up until these rules came out you still had to file your Regulation A paperwork in person. They (SEC) have incorporated it into EDGAR. It’s common sense but they hadn’t done it yet.”
While Title III may not be dead, the SEC may be preparing to take the old mare behind the barn based on how hard they are making Title III compared to Title IV.
“When the SEC set out their proposed rules for the two, I remember reading them and everyone who deals with this for a profession saying, ‘Wow the SEC really likes Title IV,'” Mr. Almerico said.
“And they really hate Title III.”
“I’m not going to say it’s cheaper to do a Regulation A+ offering because it won’t be, but for a bang for your buck it almost makes no sense to do equity crowdfunding under the way the rules are proposed as opposed to doing this,” he added.
Mr. Almerico said the SEC wants to see how Title IV plays out in terms of public reaction and the type of fraud that occurs before moving ahead on Title III. The public nature of Title IV means the SEC will have some say in what happens, unlike the private aspect of equity crowdfunding where the SEC would have to react after something happens, he said.
While the excitement over Regulation A+ is understandable, Mr. Almerico cautions companies considering participation in it to carefully consider how you want your company to look when the euphoria subsides.
“Remember this is not for everybody,” he noted. “You’re basically taking your company out of the private sector when you do this.”
Part of those added responsibilities are reporting requirements. You are much more of a public company and not everyone likes ceding control to additional people.