The Jumpstart Our Business (JOBS) Act has opened the door to new and innovative financing. For example, social enterprises can now use platforms to crowd fund the sale of equity securities. Another new development is an updated "Regulation A+" offering, or what some people are calling the "mini-IPO." This can be used as another source of funding for budding social enterprises and provide a viable exit for early stage impact investors.
Regulation A+ is Title IV of the JOBS Act, and it allows companies to raise up to $50 million from both accredited and non-accredited investors in a one year period. Title IV is limited to US or Canadian companies that are not already SEC reporting companies. Certain investment companies are also ineligible as are companies that have been disqualified under the “bad actor” rules.
There are two different tiers with varying rules. Tier 1 is for companies looking to raise up to $20 million in a given year. Tier II is for annual offerings of up to $50 million. Companies who are offering between $20 million and $50 million can chose if they want to participate in Tier 1 or Tier 2.
Tier 2 requires more rigorous reporting, such as audited financial and filing annual, semi annual and current event reports. Tier 2 investors are also limited to investing no more than 10% of their annual net income or net worth (whichever is greater) in a Tier 2 offering. However, securities sold to “qualified purchasers” in Tier 2 offerings are preempted from state securities law qualification requirements and registration. Tier 1 investors have no limitation on how much they can invest, but offerings are still subject to state and federal qualification requirements and registration.
Companies can use Regulation A+ and then later become a fully reporting SEC company and be traded on an exchange. As long as a company meets the requirements of the exchange (such as the NYSE or NASDAQ), it can list on one of them by registering with the SEC as a fully reporting company. The Regulation A+ offering can also be listed simultaneously with an offer listed on an exchange, however the benefit of regulation A+ is the lesser reporting requirements, so this is not likely to be a practical choice.
We have yet to see how Regulation A+ will play out in practice, because it is so new. But in theory it presents a viable opportunity for impact investors to get a financial return earlier when investing in smaller scale business, as many social enterprises tend to be.