Regulation A (Reg A) offerings were revamped under the Jumpstart Our Business Startups Act (JOBS Act) in 2012 to increase the maximum offering size of exempt securities from $5 million to $50 million.[1] However, despite this potential source of early-stage financing for small businesses, only 240 Reg A filings were received by the Securities and Exchange Commission (SEC) in 2021, and only 229 were received in2022, with an average total amount of funding of about $5 billion per year, representing less than 1 percent of all private equity raised in the U.S. during the period.[2]
A 2018 Barron’s article, “Most Mini-IPOs Fail the Market Test,” found that, on average, Reg A securities had underperformed the broader market by nearly 50 percent in the six months following their issuance.[3] In a new paper, while not examining short-term investment performance, I present the first comprehensive study of Reg A filings since the implementation of the JOBS Act in July 2015 and explore the reasons for the limited interest in this funding approach among small businesses. The paper also examines the key factors behind successful SEC qualification of Reg A offerings.[4]
The JOBS Act was passed as a response to the Global Financial Crisis and the slow economic recovery that followed. Its purpose was to stimulate economic growth and job creation by easing the process for small businesses and entrepreneurs to raise capital. The JOBS Act received overwhelming bipartisan support and was promoted as a means to alleviate the struggles of small businesses in accessing capital, which had led to a tightening of credit markets and increased regulatory scrutiny. The JOBS Act brought significant changes to the regulatory framework for securities offerings and was considered a major piece of legislation that would affect a large part of the U.S. investment industry.
The JOBS Act included several important provisions, including the creation of a new type of securities offering called “crowdfunding.” Under Regulation Crowdfunding (Reg CF), small businesses were permitted to raise up to $1 million from a diverse group of accredited and non-accredited investors online, without having to go through the more rigorous process of a traditional securities offering. Another significant provision that received less attention was the relaxation of restrictions on Reg A offerings. This allowed small businesses to offer and sell securities to the public with lessened requirements for registering with the SEC under specific conditions. These offerings, which are also frequently issued on crowdfunding platforms, enable firms to raise considerably more than Reg CF issues.
Reg A was originally established by the SEC under Section 3(b) of the Securities Act in 1933 as a way for small issues to be exempt from registration.[5] Over the years, the annual offering limit allowed under this exemption was revised several times and eventually raised to $5 million in 1992. However, Reg A was still seen as a costly option for small businesses to raise capital, especially when compared with other alternatives such as private offerings under Regulation D or Section 4(a)(2) of the Securities Act of 1933.[6] Prior to the implementation of the JOBS Act, Reg A was seldom used, averaging only eight filings per year. Figure 1 illustrates this limited usage.[7]
Figure 1. Number of qualified Regulation A offerings, 2005-2015
My study examined data on Reg A filings from July 2015 to December 2022, using the SEC’s EDGAR database system. The average number of annual qualified filings was 147, a significant increase over the annual number for the decade prior to the implementation of the JOBS Act. The study identified five key trends and patterns in Reg A offerings over time, including:
- Number of Filings per Year: The number of filings increased over time (especially Tier 2 offerings), with a peak of 274 filings in 2021 (see Figure 2).[8]
- Percentage of Qualified Offerings by Year: The percentage of offerings qualified by the SEC increased from 39 percent in 2015 to 78 percent in 2022.
- Offering Size Distribution of Qualified Offerings: The average offering size of qualified offerings was $22 million, with a range of $1.5 million to $75 million. Larger offerings were positively associated with SEC qualification, indicating that issuers who align their offering size with their financial fundamentals are more likely to obtain SEC qualification.
- Use of Professional Advisers in the Registration Process: The use of professional advisers, such as lawyers and accountants, was positively associated with SEC qualification. Issuers who engage professional advisors earlier in the process likely signal a higher level of competency to the SEC.
- Industry Distribution of Qualified Offerings: The technology sector had the highest number of qualified offerings, followed by healthcare and consumer goods.
Figure 2. Number of Regulation A qualified offerings, July 2015-December 2022
The study’s findings have several implications for small businesses seeking early-stage financing through Reg A offerings. First, aligning offering size with financial fundamentals and engaging professional advisers can significantly increase their chances of obtaining SEC qualification. Second, policymakers should explore ways to streamline the qualification process and reduce regulatory burdens for small businesses seeking to raise capital through Reg A offerings. This can facilitate cost-effective approaches to promote the sale of exempt securities to the public by small businesses.
Reg A offerings can provide small businesses with a valuable source of early-stage financing; however, the perception of high offering costs is a deterrent. Policymakers can use the findings of this study to develop more cost-effective financing options for startups and entrepreneurs, while ensuring investor protection and supporting economic growth. The study also provides insights into trends and patterns in Reg A offerings over time, highlighting the factors that contribute to SEC qualification. Small businesses seeking funding through Reg A offerings can use this information to increase their likelihood of success in obtaining SEC qualification.
Based on my research, it appears that Reg A firms are typically characterized as younger, smaller, and less profitable compared with established publicly traded firms. As a result, investing in Reg A offerings can carry a higher level of risk due to the potential for failure and volatility. However, it is worth noting that these firms also can grow rapidly and offer significant returns on investment. Before making any investment decisions, it is crucial for investors to conduct thorough research and assess their risk tolerance. Ultimately, the decision to invest in a Reg A offering should be made with careful consideration of individual investment objectives, risk appetite, and financial circumstances.
[1] U.S. Congress. (2012). H.R. 3606 – Jumpstart Our Business Startups Act.
[2] PitchBook reported more than 8,600 private equity deals were completed in 2021. PitchBook (2021). “Annual US PE Breakdown” [https://pitchbook.com/news/reports/2021-annual-us-pe-breakdown].
[3] The article by Alpert, Arends, and Walsh only addressed the return performance of Reg A offerings and urged investor caution. [https://www.barrons.com/articles/most-mini-ipos-fail-the-market-test-1518526753].
[4] Qualification for a securities offering means that the SEC has reviewed and approved the offering circular, which allows the issuer to sell the securities to the public.
[5] U.S. Securities and Exchange Commission. (1933). Securities Act of 1933, 15 U.S.C. § 77a et seq. § 3(b).
[6] The Government Accounting Office examined issuance activity during 1992-2011 and found offering costs to be the major reason for the low utilization of the Reg A exemption. Government Accountability Office (2012). “Factors that May Affect Trends in Regulation A Offerings” GAO–12–839, [http://www.gao.gov/assets/600/592113.pdf].
[7] Data obtained from the SEC’s DERA report to Congress in 2017 on access to capital and market liquidity. Division of Economic and Risk Analysis of the SEC (2017). “Report to Congress, Access to Capital and Market Liquidity” [https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf].
[8] Tier 1 Reg A offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 Reg A offerings allow companies to raise up to $75 million in a 12-month period, but also have additional disclosure requirements and ongoing reporting obligations.
This post comes from David Krause, an emeritus professor of finance at Marquette University. It is based on his recent paper, “A Comprehensive Study of Regulation A Offerings Since Implementation of the JOBS Act,” available here.