Test the Waters with Reg A+
A lot is being written about whether revised Regulation A (Reg A+), which went into effect June 19, 2015, is a viable way for early stage, or even mid-stage, companies to raise capital.
Most commentators seem to feel that the legal and financial compliance costs are too great for most businesses to undertake capital funding under Reg A+. While the expense will certainly be too great for many businesses, the actual cost will vary significantly from enterprise to enterprise.
On a very simple measure, the cost as a percent of capital raised obviously depends on the legal and CPA costs and the amount of the raise. The U.S. is awash in competent attorneys with a wide range of compensation levels and structures. The cost of acquiring certified financials will vary widely based on the depth and complexity of the financial review that must be undertaken by a CPA.
Any enterprise, whether startup or late stage, must take a hard look at these initial costs. If these costs seem viable, the enterprise might “test the waters” under Reg A+ to see if prospective investors might have any interest in the securities offering. If the company receives sufficient positive feedback to warrant selling securities under Reg A+, the company can then engage the legal and financial services necessary to develop and submit a Reg A+ offering statement for SEC review. Conversely, the company can avoid incurring these costs if it abandons its Reg A+ offering due to insufficient interest among prospective investors targeted via its “test the waters” campaign. No harm, no foul. (“Testing the waters” under Reg A+ is governed by state and federal laws and regulations, so retain advice of legal counsel prior to undertaking this provision of Reg A+.)
The “test the waters” provision is a key positive attribute of Reg A+, permitting the enterprise to validate, or invalidate, its plan without incurring too much expense. Rather than discouraging the use of Reg A+ because of preconceived notions about its cost viability, business owners might be better served with advice about how to assess the legal and financial costs of undertaking a Reg A+ offering and how to “test the waters” under Reg A+, so that each business can decide for itself whether Reg A+ is a potentially viable way to raise capital.
The information contained in this article is for informational purposes only and is not intended as legal advice. Your circumstances are likely unique, and you should therefore consult with legal counsel prior to implementing any of the concepts discussed in this article.
Michael Sewell, MBA and JD, has practiced law in Missouri since 2005, and he is the owner of Sewell Law, LC, which helps clients with business formations, private securities offerings, and litigation.
Feel free to contact Michael through www.stlouisllcattorney.com.
This article was published on July 1, 2015.
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