Some recent moves by the Securities and Exchange Commission (SEC) provide digital currency startups with an easier path to procuring up to $50 million in capital.
A brief history of crowdfunding legislation is in order. Prior to 2012, the securities market was primarily open only to accredited investors – defined (for individuals) as those with assets over $1 million or income over $200,000. If an individual did not meet those requirements, the individual was “non-accredited” and could not, for the most part, go online and purchase stock without using some sort of intermediary.
In 2012, the JOBS Act became law, and it contained two groundbreaking changes that opened up the securities market. The first change, found in Title III of the Act, permitted some businesses to use online crowdfunding platforms to raise up to $1 million from non-accredited investors. The second change, found in Title IV of the Act (and previously compared by Goodwin Procter to existing rules), would have permitted businesses to raise a “baby IPO” of up to $50 million. However, at that time the SEC did not immediately implement Title IV, saying that it required further rulemaking to determine who could and could not take advantage of the new rule.
The SEC, after additional rulemaking, adopted on March 25 the final version of the “baby IPO” rule, in the form of Regulation A+.
The new regulation permits two tiers of securities offerings for certain businesses. Tier 1 offerings are those up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the business. Tier 2 offerings are those up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the business.
Companies in a Tier 2 offering get the benefit of not having to worry about state securities laws. Thus, a company with a Tier 1-sized offering that wants to avoid its state securities laws can comply with additional requirements associated with Tier 2 offerings in order to avoid having to register the offering in its state. All Tier 2 offering companies have to, for example, give audited financial statements to the SEC, file annual, semiannual, and current event reports with the SEC and limit the amount of securities non-accredited investors can purchase in a Tier 2 offering.
This last requirement places Tier 2 companies in the role of a watchdog. Tier 2 companies have to ensure non-accredited investors do not put more than 10% of their annual income or net worth (whichever is greater) into the company. In order to ease that burden, these companies could potentially hire third party vendors that focus on investor verification.
In the digital currency world, where accredited investors and institutional relationships may be hard to come by, these rules may provide a powerful alternative pathway to raising capital.
This brief summary, naturally, only gives some flavor to the new rule, and does not cover every quirk and nuance to Regulation A+. The complete regulation can be viewed here.