The Securities and Exchange Commission on Wednesday approved new rules for mini public stock offerings, a move supporters hope will make it easier for small and mid-sized companies to raise capital by cutting red tape.
The rules apply to what are known as Regulation A offerings, creating what a Forbes commentator called “a new kind of ‘IPO lite’ that could be hugely beneficial for companies and investors alike.”
Regulation A currently limits deals to $5 million and requires issuers to register the offering and pay fees in every state in which they are selling under the so-called blue sky laws. That, critics say, has resulted in very few Reg A deals, with companies deciding it’s not worth going through all the bureaucratic hoops.
The new rules raise the funding cap to $50 million and preempt state oversight of deals between $20 million and $50 million, while subjecting them to stricter federal disclosure requirements. For issuers of deals between $5 million and $20 million, the rules will be the same as under the current Reg A.
“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 news release.
The commission acted in response to the 2012 Jumpstart Our Business Startups (JOBS) Act, which relaxed securities rules for smaller companies to help them raise money and go public. Reg A’s use has declined sharply since the 1990s, with many attributing the trend to high offering costs and the necessity of complying with state blue sky laws.
During the rule-making process, state securities regulators objected to the expansion of Reg A, warning that it would encourage fraud. To ease those concerns, The Washington Post reports, the SEC agreed to require issuers to file their paperwork to the SEC for public review several weeks before they start selling to investors, “giving state regulators a chance to comb through those documents if they wish to look for red flags.”
“[The] change had to happen, or else Reg A was going to continue to be a dead-letter, never-used alternative,” DJ Paul, a member of the SEC’s advisory committee on small and emerging companies, told the Post.