In the last post, I noted that it looks like the earliest that crowdfunding and Reg. A+ offerings will be possible is January 2016. The question is what companies or real-estate funds can do now if they want to raise investor money in a way that both allows full public advertising and does not require that the investors all be accredited (as the year-old Rule 506c offering does)?
The practical choices are a federal S-1 offering, the current Reg. A offering (both of which have the option of getting the securities trading on the over-the-counter market) or a single-state qualification by permit. These are all registrations, meaning that a securities regulator must approve the offering before it can be started. There can be an unlimited number of investors with each of these.
The federal S-1 offering requires approval of the offering by the SEC before the offering can begin. Once the offering – which can be for an unlimited amount — is approved, it may be sold to investors in every state and publicly advertised. This approach has downsides, though: The financials must be audited and the company becomes a reporting company, meaning that it must file quarterly and annual reports with the SEC, which costs time and money.
On the other end of the spectrum, each state has its own qualification by permit process. Again the offering must be pre-approved, this time by that state’s securities department. There are low or no investor requirements and the offering can be publicly advertised – but it is limited to investors who reside in that state.
The details vary from state to state. For example, California has a qualification by permit process that has low investor standards, either (1) a minimum net worth of at least $75,000 and minimum gross income of $50,000 or (2) a minimum net worth of $150,000, although in either case net worth cannot include the principal residence, home furnishings or automobiles. California does have a maximum offering limit of $5 million to avoid a fairness review – although a fairness review is hardly the end of the world – but it also has additional rules for real-estate offerings.
The third alternative is Reg. A. That will be the subject of the next post.
Bruce E. Methven
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