Regulation A+ & Crowdfunding Real Estate
Regulation A+ exemptions on Title IV investments is relatively new legislation that creates a broader audience of prospective real estate investors. In essence, Reg A+ allows private companies to raise substantial funds (up to $50m) from the public instead of just accredited investors.
Today we’re looking at what Regulation A+ is, the differences between Tier 1 and Tier 2 Reg A+ offerings and how crowdfunding continues to catapult this stock issuance and real estate investment strategy into mainstream business practice.
What is Regulation A+?
Regulation A+ (Reg A+) is the common name for Title IV of the Jumpstart Our Business Startups (JOBS) Act. It’s fairly new (2015) legislation that permits certain small companies to sell equitable shares to the general public. The Securities and Exchange Commission (SEC) states, “Regulation A is an exemption from registration for public offerings.”
Reg A+ exemptions allow crowdfunding platforms and startups to raise capital from both accredited and non-accredited investors. The JOBS Act helped to relax some securities regulations to stimulate private funding of small businesses in the US and Canada. Ultimately, it made raising money quicker, simpler and more affordable and accessible. In effect, it also contributed to the rapid evolution of crowdfunding.
Regulation A+ crowdfunding continues to gain momentum as a much broader audience of investors contribute capital to privately held small businesses. Under Reg A+, real estate investors no longer need to be accredited. This levels the playing field, allowing almost anyone to contribute capital.
The Mini IPO
Some people compare Regulation A+ to a mini initial public offering (IPO). An IPO refers to a private company issuing new stock shares for public investment. Of course, this means that any investor can purchase the stocks.
Accredited Investor Crowdfunding
In the past, only accredited investors could purchase stock issuances from private companies. But with Regulation A+ exemptions, virtually all investors are permitted, including crowdfunding accredited investors and non-accredited investors alike. Hence the comparison to a scaled-down IPO.
More companies are using Regulation A+ exemptions because issuing equity securities via an IPO requires overcoming various regulatory obstacles. Although an IPO is a more complicated process, the approval process for a Reg A+ offering involves substantial legal, insurance and filing expenses.
How does Regulation A+ Work?
Reg A+ exemptions are based on two offering tiers: Tier 1 and Tier 2. Each has specific caps on offering amounts and unique reporting and compliance requirements.
Tier 1 & Tier 2
Companies can choose between Tier 1 and Tier 2 Reg A+ exemptions to suit their unique needs and requirements. The most notable difference is that:
Tier 1 offerings are capped at $20 million, and
Tier 2 offerings are capped at $50 million - each within 12-month periods.
Here are some other differences between the two tiers:
Tier 1 Regulation A+ Exemptions
- Can sell up to $20 million in equity in 12 months
- Must submit financials for a state review
- Must adhere to ongoing compliance and reporting rules
- Must file Form 1-Z for completed offerings
- Must obtain approval from each state you wish to sell in
- The issuer may conduct advertising and solicitation
Tier 2 Regulation A+ Exemptions
- Can sell up to $50 million of equity in 12 months
- Ongoing auditing and reporting requirements
- Non-accredited investors are subject to investment caps
A Tier 2 offering nullifies the requirement to register in every state where securities will be sold. This preemption is referred to as “Blue Sky Laws.” Many companies opt for Tier 2 over Tier 1 because these preemptions simplify the approval process, especially during early phases.
In general, Tier 1 is the best choice for companies with a strong presence in one specific state or a small number of states where they wish to offer stocks.
Reg A+ Tier 2 offerings are more suitable for companies that will present their investment opportunities across the entire country, or to various specific states.
Timeline for Regulation A+ Offerings
The time frame for initiating a Reg A+ offering varies. However, the process typically involves:
- Filing a Draft Offering Statement (SEC Form 1-A)
- Making amendments and obtaining approval for SEC notice filing
- Obtaining Regulation A+ qualification from the SEC
- Initiation of the Reg A crowdfunding offering
- Initiation of advertising and solicitation
- Completion of fundraising
After funding is complete, ongoing reporting and SEC compliance are mandatory.
Testing the Waters
Stock issuers are allowed to “test the waters” to ensure that ample interest exists to justify filing for Regulation A+ exemption. During this testing period, issuers can utilize various marketing tools and materials to make their determinations. It’s important to note that funding may not be accepted during this period.
Regulation A+ crowdfunding platforms are booming, and experts project they’ll just continue to expand as more investors understand the opportunities they present. Reg A+ allows a crowdfunding accredited investor or a non-accredited investor to connect with developers, raising money easier and faster. It also enables non-accredited crowdfunding investors to participate and profit.
Crowdfunding is an excellent way to diversify your portfolio and get into the world of real estate. And now, it means those opportunities are more accessible than ever before. Want to learn more about Real Estate Short Notes and how you can invest in real estate like the powerhouses do? Check out Connect Invest today to learn more.