*co-authored by Elizabeth L. Carter, Esq., Managing Attorney
Summary of Title IV of the JOBS ACT
The Jumpstart Our Business Startups Act (the “JOBS Act”), enacted on April 5, 2012, established a regulatory structure for startups and small businesses to raise capital through exempt securities offerings, one of which is Regulation A+. For a more thorough background on this exemption, check out our article Regulation A+ 101. On March 25, 2015, the Securities Exchange Commission (SEC) adopted the new rules for Regulation A+ (Reg A+) to implement Title IV, Section 401, of the JOBS Act (“Title IV”). Title IV added Section 4(b)(2) to the Securities Act of 1933 which expanded Reg A+ to provide small companies with greater access to capital and investors with more investment choices. On November 20, 2020 (effective March 15, 2021), they adopted further amendments to Reg A+ in order to simplify the offering framework. Despite these new changes, Reg A+ lacks inclusivity and remains out of reach for many Black and other underrepresented entrepreneurs.
Reg A+ Update
Under these new rules, Tier 1 of Reg A+ is unchanged and continues to allow businesses to raise up to $20 million in a 12 month-period from both accredited and non-accredited investors. Also, some of the existing provisions regarding eligibility, testing the waters, and bad actor qualifications stayed consistent under these new rules, except for the December 19, 2018 provision regarding ongoing reporting requirements under Section 13 or 15(d) of the Exchange to use Reg A+. The SEC did, however, expand Tier 2 so that it now allows businesses to raise up to $75 million in a 12-month period from both accredited and non-accredited investors. Learn more about these new crowdfunding rules and others at our articles "Show me the Money!"
SEC 2020 Report on Reg A+
The SEC conducted a study on Reg A+ to analyze its use from 2012 to 2019 and their findings were reported in 2020 under “A Look back Study and Offering Limit Review Analysis.” In this report, the SEC found the amount of capital raised in both Tier 1 and Tier 2 between 2015 and 2019 increased greatly from its inception in 2012.
183 issuers reported they raised $2.446 billion in Reg A+ offerings
$230 billion raised under Tier 1 and
$2.216 billion raised under Tier 2 offerings
487 issuers reported they filed offerings averaging $22.9 million
145 filed Tier 1 offerings of $1.102 billion
342 filed Tier 2 offerings of $10.069 billion
382 issuers sought approved offerings averaging $23.8 million
105 qualified Tier 1 offerings sought $759 million
277 qualified Tier 2 offerings sought $8.336 million
Reg A financing levels in total were significantly higher between 2016 and 2019 than before the 2015 rules because of the increased offering limit and a number of offerings. Although used less frequently than other exemptions, Reg A+ was found to be more popular in urban States such as New York, California, and Illinois, and used by real estate companies more than any other industry.
Racial Diversity within Reg A+ and 100th Anniversary of the Tulsa Race Massacre
According to the Office of the Advocate for Small Business of the SEC (OASB), $1.3 billion was raised using Reg A+ between July 2019 and June 2020 by “mature and later stage companies,” and “small public companies,” with $2.1 million as the median. “Mature and later stage companies” are defined by the OASB as companies that “are generally growing and looking for larger amounts of capital that can fund operations of scale, ventures into new verticals, and preparation for public markets.” Likewise, the OASB defines “small public companies” as companies that can “access broad pools of investors... allowing companies to raise large amounts of capital to fund activities such as research and development, capital expenditures, or debt service…[and that] provide liquidity to early-stage investors and publicity for the company’s products and services.” How many of these companies were Black-owned? What changes need to be made in order to make Reg A+ more applicable to Black-owned companies?
The Tulsa Real Estate Fund (“TREF”) is the first Black-owned company to use Reg A+ Tier 2 to raise capital. TREF has received national recognition in Forbes, local news broadcasts, and more for both the historical significance of the Fund and its early success in capital raising. The name is in honor of Black Wall Street, prominent concentrations of Black businesses within the United States during the early 20th century, which were systematically destroyed by White-mobs sanctioned by the U.S. and State governments through the national guard. In 2020, Gilmore Homes-Gilmore Loans LLC became the second Blacked-owned company that qualified for Reg A+ Tier 2 in order to raise $50 million in one year. Based in Atlanta, Georgia, this is another real estate company that has shown that Reg A+ can be a viable crowdfunding tool for Black-owned businesses and real estate investment funds.
Last week was the 100th Anniversary of the Tulsa Race Massacre, and Black-owned Reg A+ funds like the Tulsa Real Estate Fund and Gilmore Homes-Hilmore Loans, LLC are great efforts at reclaiming Black capital for Black businesses, investors, and the broader Black community after the race massacres of the 20th century. Still, more needs to be done to ensure that capital raising tools like the crowdfunding exemption Reg A+ may be utilized by more funds and businesses within the Black community. In their 2020 Diversity and Inclusion Strategic Plan, the Office of Minority and Women Inclusion of the SEC proclaimed five goals for increasing racial minority inclusion and access to various exempt capital raising tools. These include:
GOAL 1: Demonstrate leadership commitment and accountability through agency policy, messaging, and behavior that advances diversity and inclusion goals and objectives;
GOAL 2: Foster a connected culture by cultivating a supportive, welcoming, inclusive, and fair work environment that allows employees to feel connected to the agency’s mission and contribute to their full potential;
GOAL 3: Build a diverse talent pipeline in order to build and maintain a high-performing workforce drawn from all segments of American society;
GOAL 4: Leverage diversity and inclusion for mission effectiveness by using SEC resources and services in a manner that reflects diversity of investors and businesses;
GOAL 5: Promote business diversity with SEC stakeholders through the advancement of diversity and inclusion in the SEC supplier base and with entities regulated by the SEC.
We do not doubt that the above goals are likely to enhance some diversity and inclusion efforts, but what the Tulsa Race Massacre during the early 20th century, and the hundreds of others just like it, taught us, is that Black businesses and investors need greater access to capital and stronger means for protecting that capital. As real estate seems to be one of the main means of generating wealth and formulating capital in the U.S., this could mean that the SEC may need to redefine its “accredited investor” definition so that more Black homeowners and real estate investors may qualify and obtain new wealth; as well as, lower the cost of raising capital through less regulatory burdens so that more Black businesses and funds may realistically utilize Reg A+ and provide better commercial and homeownership opportunities for Black investors and consumers. This is especially true where banks and other traditional financing still engage in discriminatory practices against Black people as shown by their higher interest rates and lower loan amounts than their counterparts, i.e. the “Black tax.”
If you are interested in raising capital through Reg A+, then schedule a consultation with us today!