SEC Clears Regulatory Hurdles For Small Business IPOs

Small businesses will soon be able to go public in the U.S. with smaller regulatory requirements under rules approved by the U.S. Securities and Exchange Commission on Wednesday (March 25).

The rules, which amend the SEC’s Regulation A, will let smaller companies publicly sell up to $50 million in securities over a 12-month period, as long as they meet eligibility requirements and do the necessary reporting and disclosures to regulators. The previous cap on how much they could raise was $5 million.

More important, the new rules also make it unnecessary for some public offerings of between $20 million and $50 million to be registered with state regulators in every state where prospective shareholders live. That was viewed as a major reason why Regulation A stock offerings have rarely been used in recent decades.

“I have never felt that the $5 million cap was that significant,” D.J. Paul, who serves on an SEC advisory board, told The Washington Post, pointing out that the average fundraising round is for less than $3 million. “The real friction point has been this state approval requirement.”

Companies using the new “Reg A+” rules will have to meet increased SEC requirements, including earlier filings so state regulators can vet documents to watch for fraud.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” SEC Chair Mary Jo White said in a prepared statement. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

The rule changes, which were unanimously approved by the commissioners, have been in the works since the Jumpstart Our Business Startups (JOBS) Act was signed into law in 2012. The SEC has been slow to move on the necessary regulations, in part because of state regulators’ concerns about the phony stock offerings that Reg A was originally enacted to prevent. But with the SEC approval, the rules will go into effect 60 days after their publication in the Federal Register.

Under the new rules, stock offerings of less than $20 million in a 12-month period will still have to meet state regulatory requirements, though they can take advantage of a coordinated review program developed by the North American Securities Administrators Association to simplify the process somewhat.

But for offerings between $20 million and $50 million, the rules preempt state securities law registration requirements if securities are offered only to “qualified purchasers” — typically, investors with less than $1 million in net worth. Those bigger rounds will also require additional SEC review, and companies will have to file their SEC paperwork for public review several weeks before they begin selling to investors, so state regulators have a chance to check them out.

The SEC has yet to approve regulations to allow other parts of the JOBS Act to go live, including Title III, which would allow businesses to raise up to $1 million from average citizens without regulatory paperwork — including over the Internet through crowdfunding.