Raising Capital with JOBS Act: what’s the best regulation?

The landscape of private capital markets has been significantly reshaped by the Jumpstart Our Business Startups (JOBS) Act, signed into law in 2012.  

This landmark legislation introduced several regulatory pathways for companies to raise capital more efficiently and effectively. Among these regulations, the most commonly used are Regulation A+, Regulation D, and Regulation Crowdfunding (Reg CF). 

This blog post aims to explore these regulations, their key features, and provide insights on choosing the best regulation for your business.

Introduction to the JOBS Act

The JOBS Act was designed to democratize access to capital, making it easier for small businesses and startups to raise money from a broader pool of investors. By providing different regulatory pathways, the JOBS Act offers businesses various options tailored to their specific capital-raising needs. Understanding the characteristics of each regulation is crucial for companies aiming to leverage these opportunities effectively.

Exploring the Options

Regulation A+

Regulation A+, often referred to as Title IV of the JOBS Act, allows companies to raise up to $75 million annually from both accredited and non-accredited investors. This regulation is divided into two tiers:

• Tier 1: Allows for offerings up to $20 million. It requires a comprehensive SEC review but has simpler ongoing reporting requirements.
• Tier 2: Allows for offerings up to $75 million and includes more rigorous reporting and auditing requirements, akin to those of a public company, but provides exemption from state securities law (blue sky) requirements.

Key Features of Regulation A+:

• Maximum Offering Amount: $75 million per year.
• Investor Restrictions: Non-accredited investors can participate but are limited to investing no more than 10% of their annual income or net worth.
• Reporting Requirements: Tier 2 offerings require audited financials and ongoing annual, semi-annual, and current event reports to the SEC.

Regulation D

Regulation D, particularly Rule 506(b) and Rule 506(c), is the most utilized exemption, allowing companies to raise an unlimited amount of capital from accredited investors with fewer disclosure requirements compared to public offerings.

• Rule 506(b): Allows companies to raise an unlimited amount of money from accredited investors and up to 35 non-accredited but sophisticated investors. General solicitation and advertising are prohibited.
• Rule 506(c): Permits general solicitation and advertising but requires all investors to be accredited and the issuer to take reasonable steps to verify their accredited status.

Key Features of Regulation D:

• Maximum Offering Amount: Unlimited.
• Investor Restrictions: Primarily accredited investors, with limited allowances for sophisticated non-accredited investors under Rule 506(b).
• Reporting Requirements: Minimal SEC reporting beyond filing Form D within 15 days of the first sale.

Regulation Crowdfunding (Reg CF)

Reg CF allows companies to raise up to $5 million annually from a wide pool of investors, including non-accredited investors. It is particularly beneficial for startups and small businesses seeking smaller amounts of capital.

Key Features of Regulation Crowdfunding:

• Maximum Offering Amount: $5 million per year.
• Investor Restrictions: Non-accredited investors can invest, with limits based on their annual income or net worth.
• Reporting Requirements: Requires disclosure of financial statements and annual reports to investors and the SEC.

Considerations for Issuers

Choosing the right regulation depends on various factors unique to each business. Here are some considerations:

Funding Needs

• Assess the amount of capital required and the timeline for raising it. For larger raises, Regulation A+ or Rule 506(c) of Regulation D may be suitable, whereas Reg CF is ideal for smaller raises.

Desired Investor Pool

• Determine whether you want to target accredited or non-accredited investors. Regulation D is typically more suited for accredited investors, while Regulation A+ and Reg CF allow broader participation from non-accredited investors.

Company’s Financial State and Future Growth Plans

• Consider your current financial position and long-term growth strategies. Regulation A+ might be more appropriate for companies with robust financials and a clear growth trajectory due to its stringent reporting requirements.

Complexity of Compliance

• Evaluate the complexity and cost of compliance associated with each regulation. Regulation A+ and Reg CF involve more detailed disclosures and ongoing reporting compared to Regulation D, which offers a more straightforward compliance path .

Conclusion: what is the best regulation?

The JOBS Act provides a versatile toolkit for companies seeking to raise capital, with each regulation offering distinct advantages and limitations. The best regulation for your business depends on your specific circumstances, including your funding needs, investor base, financial health, and compliance capabilities.

Thorough research and consultation with legal and financial professionals are essential to making an informed decision. Remember, the JOBS Act has opened up unprecedented opportunities for capital formation, enabling businesses to access the funds they need to innovate and grow.

As the leading technology infrastructure company built for the JOBS Act regulations, KoreConX brings together all the necessary technology and intermediaries to streamline your funding activities. From pre-raise preparation to investor activities during the raise and post-raise communications and reporting. Explore how KoreConX can simplify your capital-raising efforts under the JOBS Act in a trusted, compliant, and cost-effective process.