Reg. A and the Reawakening of American Entrepreneurship!
About 25 million small businesses employ more than 50 percent of the private workforce and generate more than half of the nation’s gross domestic product. The entrepreneurs driving the growth of our country suffered particularly in the aftermath of the 2008 financial crisis, as most traditional sources of capital dried-up. Small business expansion and support has not been the priority of the current U.S administration, and the banking system failure has had a chilling effect on initiative and capital growth.
That situation may be changing, however. The legislative branch, through the leadership of a few, has realized that the government failed to revive the economy as rapidly as was hoped; that capital formation can only be efficiently created from the bottom up; and that government cannot be the principal source of job creation. This has resulted in the passage and ongoing implementation of the Jumpstart Our Business Startups Act (the “JOBS Act”), a bipartisan bill passed into law and signed by President Obama on April 5, 2012. One of the most exciting provisions of the JOBS Act is “Title IV,” also known informally as “Reg A+.” We believe Reg. A+ has the potential to reignite American entrepreneurship, and take it to dimensions never achieved before.
Reg. A Explained
Reg. A is sometimes referred to as a “Mini IPO.” Under Reg. A, which will now run parallel to Reg. A+, private companies benefit from the following: (i) they may raise up to $5 million in any rolling twelve-month period, through sales of their securities, without complying with the usual registration requirements of the Securities Act, including quarterly and annual reporting; (ii) companies offering shares under Reg. A are not subject to a full audit and may instead simply submit “reviewed” financial statements, which is substantially less expensive; in addition, (iii) Reg. A enables pre-existing shareholders with an opportunity to resell a limited dollar amount of their unregistered securities; furthermore, (iv) securities sold through Reg. A are freely tradable over any exchange that would host such trade or on any platform (one could argue that they might even be resalable on eBay), moreover, (v) offering statements issued under Reg. A are reviewed by both the SEC and state securities regulators (under the states’ so-called “Blue Sky” laws).
Perhaps Reg A’s most important attribute – and one that is continued in Reg. A+ – is the ability to generally solicit, advertise, and collect funding from ALL investors, accredited and non-accredited, alike. It is through this provision that we see potential for tremendous upside.
Keys To Success
Despite being bailed-out, many banks are still not lending to small businesses as much as they could or should. One of the reasons for this tight credit is that the Federal Reserve is actually paying banks interest for their money to be held in the banks’ reserves. As a result, bank reserves have increased from $2 Billion in 2008, to $1.8 Trillion in 2013.
Money that otherwise could be used for job creation or made available for infusion into the marketplace to help small businesses and support growth is, instead, sitting idle. Under the proposed rules and the current provisions of Title IV and its two tiers of Reg. A, entrepreneurs, startups and emerging companies may directly access a large pool of capital from its source – the People – thereby allowing investors to eschew traditional sources of capital.
Reg. A and Reg. A + and “The Democratization of Capitalism!”
Providing entrepreneurs and smaller companies with the ability to directly access capital from those citizens who most believe in the company – regardless of social status or wealth – will not only allow companies to raise more money than they do now, but to raise “better” money, because it will be invested by people with personal, not merely cash-related, reasons to be invested.
While the audit requirement may increase the administrative burden on the offering companies, it will benefit the investing public by providing additional transparency and credibility. This additional transparency and credibility is critical because Reg. A’s ultimate benefit over Reg. D is its ability to include ALL investors – accredited and non-accredited, alike – in its investment universe. Even then, investors in Reg. A shares will be able to freely trade those shares on secondary markets, thereby attaining a measure of liquidity and self-determination as to when they want to “cash-out” their positions. This option is not available to Reg. D shareholders.
The Future Is Now!
Entrepreneurs are, for the first time, allowed to freely solicit capital and present their projects to a vast pool of participants all on more equal footing. For the first time in decades, the gap between the 1% and the 99% is being reduced. At least when it comes to accessing capital and participating in equity, and all of this has been made possible through a bipartisan piece of legislation that could well be the unintended masterpiece of the Obama Administration. Through Reg. A as the true “crowd funding,” we “the people” can shift the balance of powers and readjust from an un-egalitarian system to one that voices individualism over corporatism, as a reflection of true capitalism and libertarianism.
Both the right and the left should find some comfort in the JOBS Act: freedom and the ability to support transactions through meritocratic ideals are espoused while assisting a true liberal free marketplace in which companies compete for the attention of the individual investor and consumer through the worldwide web.
We believe a new era of smaller-scale, but powerfully vital, entrepreneurship is dawning. The financing is out there in the shape of tens of millions of Americans who have never before had the opportunity to partake in private equity at such stage in the game. It is now up to you to make them join in and make it happen. The dialogue is open and the internet and social media is its new platform for interaction.
What opportunities has the JOBS Act afforded your small business?
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