Sponsored Content provided by Med-X
When a startup begins to make money and prove its business model, it often needs additional financing to expand its growth. And while entrepreneurs do have options, such as a direct filing, reverse merger or PIPE, each option is highly nuanced, creating entry barriers for some of those on the path to capital.
The Jumpstart Our Business Startups Act, also known as the JOBS Act, was signed into law on April 5, 2012, and it was meant to make it easier for expanding startups to solicit equity financing from accredited and non-accredited investors, while also decreasing financial disclosure costs; however, the program’s slow roll-out had many wondering if it would ever come into fruition.
On Sept. 23, 2013, Title II of the JOBS Act went into effect, eliminating the ban on general solicitation and advertising for Rule 506 and Rule 144A offerings, opening up private placement potential for startups seeking capital from accredited investors.
Startups looking to the general public for financing greater than $1 million had to wait until March 25, 2015, for the SEC to announce that it had adopted the final Regulation A+ rules, under Title IV of the JOBS Act, enabling private companies qualified by the SEC to offer and sell up to $20 million worth of securities under Tier 1 requirements, and up to $50 million under Tier 2 requirements, to both accredited and non-accredited investors.
While financing a regular startup is challenging, financing a cannabis-related startup is even more difficult. Regulation A+ could be a game changer for the legal cannabis industry by letting everyday cannabis consumers financially support the companies they love.
“The Regulation A+ has really given us all opportunity, especially in this sector,” said Matthew Mills, COO of Med-X, a multi-divisional cannabis company focused on medical research, agricultural products and digital media. Mills will be giving a spotlight presentation on Med-X on March 5, 2016, at the California Cannabis Business Expo.
Med-X is one of the first cannabis company to be qualified by the Securities and Exchange Commission to sell shares to the general public through Regulation A+ and it has already launched its campaign and has approximately $3.5 million in non-binding reservations from over 1,000 potential investors on StartEngine.com.
Because of its potential implications, startups seeking capital should familiarize themselves with three of the most critical benefits of Regulation A+.
All Investors Welcome
Members of the general public may have previously wanted to invest in a hot new startup, but federal securities law prevented them from getting in on the action unless a startup was doing an IPO, which is an expensive undertaking for a startup. Under that scenario, accredited investors could get in early and the general public had to watch from the stands.
Regulation A+ now permits members of the general public to invest in offerings by private companies that have been qualified by the SEC. This allows a startup to turn to people who believe in the company’s mission to help it secure the necessary capital needed to grow.
Potential investors should pay attention to the details of a Regulation A+ offering, as the SEC has different requirements based up whether the offering is categorized as Tier 1 or Tier 2.
A Tier 1 offering, open to accredited and non-accredited investors, does not impose a limit on the amount an individual investor may invest. A Tier 2 offering, also open to accredited and non-accredited investors, does not impose an investment limit for accredited investors, but it stipulates that non-accredited investors cannot invest more than 10% of their annual income or net worth.
“Testing the Waters”
Your startup may have potential, but simply building it doesn’t mean customers will come. The same holds true for financing—you may need capital to grow your company, but that doesn’t mean you’ll actually secure it.
While “testing the waters,” a provision enabling issuers to solicit interest for a potential offering, was included in the new Section 5(d) of the Securities Act, as stipulated by the JOBS Act, that specific provision applies to issuers seeking capital from accredited investors and institutional buyers.
For an emerging growth company seeking capital from the general public, Regulation A+ allows a qualified issuer to solicit interest from the general public regarding its potential offering. According to the final rules, “issuers will be permitted to test the waters with all potential investors and use solicitation materials both before and after the offering statement is filed, subject to issuer compliance with the rules on filing and disclaimers.”
This ability to test the waters lets an issuer gauge investor interest, regardless of investor type, before proceeding with a Regulation A+ offering. This provision is crucial because it allows issuers to determine whether the amount of investor interest is enough to justify the cost associated with the registration, accounting and legal fees associated with pursuing a Regulation A+ offering.
Goodbye Blue-Sky Filings
A startup’s need for capital can become more expensive once it realizes the associated fees that can accompany certain financing options.
The original version of Regulation A was used by self-issuers until the filing costs and regulatory burden became too excessive. For example, in 1984, Ben & Jerry’s raised $750,000 through an intrastate direct public offering, essentially the equivalent of a state Regulation A filing.
Ben & Jerry’s offering was limited to Vermonters; however, when an issuer made an offering in multiple states, Regulation A required that the issuer comply with all blue-sky laws, state laws regulating securities, for the states in which the issuer’s investors lived. Startups that couldn’t afford the total cost and energy needed to devote to state-by-state blue-sky laws shelved Regulation A as an option for financing.
While Regulation A+ still requires that issuers under Tier 1 comply with state blue-sky laws, the North American Securities Administrators Association has launched the Coordinated Review Program for Regulation A Offerings, with the state of Washington as program coordinator, in an attempt to speed up filing time, reduce costs and alleviate other burdens associated with blue-sky filings for Tier 1 issuers.
Issuers under Tier 2 do not have to comply with state-by-state registration requirements, meaning those issuers can say goodbye to blue-sky filings and complete a single filing with the SEC. With Tier 2 issuers only having to comply with federal regulations, they can focus their time and energy on securing the financing they need to grow.