Reg A+ rules provide chance for startups to get creative
A lawyer specializing in the JOBS Act expects many companies to take advantage of the new Regulation A+ rules, including true startups who can get creative.
Mark Roderick is a shareholder at Flaster/Greenberg PS and focuses on capital raising and securities law. He often represents issuers.
Mr. Roderick believes many companies will conduct mini-IPOs under Regulation A+, which he says is a novel step for the SEC.
“In a nutshell the new Regulation A means you can raise up to $50 million from non-accredited investors at a relatively low cost,” Mr. Roderick said. “That is very much a brand new animal in the world of US securities laws and I think we’ll see a lot of companies taking advantage of it.”
Many industry watchers believe very few true startups will use Regulation A+ because of the cost to file, which ranges between $35,000 and $100,000 depending on whom you ask.
Mr. Roderick is not sure about that. He says it depends on the industry the company is in and who their customers and potential investors are.
What he does expect to see is companies conducting a smaller offering with accredited investors and use that raise to conduct a Regulation A offering.
Mr. Roderick expects certain types of companies to be very active participants in Regulation A+ offerings. Those are the ones which attract what he calls “natural non-accredited investors.”
“Take a company making a new sports drink,” Mr. Roderick said. “You would like to be able to solicit from lots of ordinary people who will also be your customers.”
“For a company like that it makes total sense to get to the non-accredited market as quickly as possible.”
Mr. Roderick has been watching the lawsuits filed by Montana and Massachusetts and said we are watching a classic turf battle.
“State regulators are bureaucracies,” Mr. Roderick said. “If there is one thing bureaucracies of any kind dislike, it is having jurisdictions removed from them.”
“Bureaucracies exist to perpetuate themselves whatever it is.”
Mr. Roderick explained state regulators would lose jurisdiction over some offerings. The tactic they are using is saying the SEC misinterpreted the definition of qualified purchaser used by Congress when writing the JOBS Act.
Mr. Roderick added he does not believe the lawsuits stand much of a chance, and they will not inflict damage along the way because they will likely be dismissed.
“Regulatory agencies are given wide latitude to interpret statutes,” Mr. Roderick explained. “It is very unlikely a court is going to decide the SEC is wrong.”
The reason everyone has been waiting so long to capitalize on Regulation A+ is specifically because the North American Securities Administrators Association has been fighting it at every step, Mr. Roderick said. He described the initial SEC proposal, filed on December 18, 2013, as being very good with few contentious points.
One story trotted out to illustrate the silliness in the lawsuits is the fact Massachusetts prevented its residents from investing in Apple. On that topic, Mr. Roderick believes the state is getting a bum rap.
“Everyone’s entitled to a mistake. Maybe Massachusetts made a mistake with Apple but perhaps they kept 250 bad actors out of the market and that’s not bad.”
Mr. Roderick said lawsuit outcomes are hard to predict. Massachusetts has asked the court to immediately impose an injunction, which could happen at any time.
The lawsuit is having zero effect on the appetite for Regulation A+, Mr. Roderick said.
“Everyone wanting to do a Regulation A offering is doing one.”
Should an injunction actually be granted, the only practical impact would be all the wasted money companies spent on lawyers and accountants in preparation for an offering, Mr. Roderick said.
Some companies may forge ahead regardless and let state regulators review, Mr. Roderick said, but it is unlikely.
“State regulations are what made Regulation A unattractive in the first place.”