In this blog, I am going to cover the requirements that a company must satisfy in order to raise capital under Title II and Title IV of the JOBS Act.
The main requirements for a company to be able to use general solicitation and general advertising to offer their securities to potential investors under Title II are as follows:
The SEC has provided additional details as to what methods are considered to be reasonable steps for verifying that investors are accredited investors. These methods include: (i) reviewing tax returns of a potential investor and getting a written representation from the potential investor that they will continue to earn the necessary income in the current year; or (ii) receiving written confirmation from a registered broker-dealer, SEC-registered investment advisor, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the potential investor’s accredited status. Please note that these methods are non-exclusive and a company seeking to issue securities under Title II must consider the facts and circumstances of each potential investor.
Any US or Canadian company whose principal offices are located in the US or Canada may use Regulation A+ under Title IV to raise capital.
For a company to offer securities under Regulation A+, the first step is to file an offering document with the SEC. The offering document must include a completed Form 1-A as well as additional relevant documentation. This offering document will end up becoming quite expansive once your legal counsel is done putting it all together. After it is prepared the offering document is submitted to the SEC for review and approval. Often times after the SEC’s initial review, the SEC will ask questions and have comments on various parts of the offering document which will lead to various revisions that need to be made by the company. Ultimately, a company cannot start selling securities under Regulation A+ until the SEC has fully approved the company’s offering document.
In addition to submitting Form 1-A and other relevant documentation as part of the offering document, a company is required to submit financial statements to the SEC. However, whether the financial statements have to be audited or reviewed depends on whether it is a Tier I or Tier II Regulation A+ offering. If it is a Tier I offering the financial statements only need to be reviewed, however if it is a Tier II offering the financial statements will need to be audited. There is a significant increase in cost if you need a CPA to audit financial statements rather than just review them.
Tier I Regulation A+ offerings do not have any ongoing reporting requirements except the filing of a Form 1-Z to report the completion of the overall offering. However, Tier II Regulation A+ offerings are a much different story and require that a company submit annual reports, semi-annual reports, and current events reports. This ongoing Tier II reporting requirement is onerous to say the least. The good news is if the company has less than 300 investors who participate in the Tier II offering then the ongoing reporting requirements disappear.
Now that I have covered both Title II and Title IV equity-based crowdfunding requirements; watch out for Part IV of this blog series: What do you need to do to raise capital as a startup company through equity-based crowdfunding under Title III of the JOBS Act?
There is lots of devil in the details within all parts of the JOBS Act and other securities laws. These blogs provide only an overview and should not be relied upon solely without consultation with a legal or financial professional.
This Blog was written by Hunter Business Law Attorney Ajay K. Singh. Profile