Regulation A+: Capital Raise of the Future?

LendIT 2016
April 12, 2016
Brian S. Korn

Structure of US Securities Laws

Securities Act of 1933
Securities Exchange Act of 1934
Trust Indenture Act of 1939
Investment Company Act of 1940
Investment Advisers Act of 1940
Private Securities Litigation Reform Act of 1995
Sarbanes Oxley Act of 2002
Jumpstart Our Business Startups Act of 2012
FAST Act of 2015

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No Offerings Unless Registered or Exempt

Exempt Securities (Section 3)
Government bonds
Commercial paper
Issued by bank
Charitable purpose and not for profit
Exchange Securities
Intrastate

Exempt Offerings (Section 4)

Not involving an issuer, underwriter or dealer
Not involving a public offering
Brokers transactions acting on customer orders
Crowdfunding
*New* Section 4(a)(7) private transfers among accredited investors

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April 5, 2012 President signs the JOBS Act

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JOBS Act Overview

To increase American job creation and economic growth by improving access to
the public capital markets for emerging growth companies.
IPO On-Ramp and Emerging Growth Companies effective immediately
Private Placement Reforms effective September 23, 2013
General Solicitation relaxed
Enhanced verification of Accredited Investors if Soliciting

Crowdfunding national online fundraising effective May 2016

Regulation A+ - from $5mm to $50 mm effective June 19, 2015
Go Public Shareholder Thresholds Increased
Relaxation on Research Restrictions
Decimalization possible move to $.09 tick increments
Prospective Issuer Outreach
Signed into law April 5, 2012

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TITLE IV: REGULATION A+

Manatt Corporate & Securities Group | Manatt, Phelps & Phillips, LLP

(Old) Regulation A

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Small offering exemption

Up to $5 million may be offered to the public regardless of accredited investor
status
Offering Circular must be used and filed with the SEC
SEC must approve OC before offering is priced
Seldom used because:
no state securities law preemption
for nearly the same effort, one can do an IPO and qualify for reduced reporting under the
Smaller Reporting Company Rules

JOBS Act 2012 - Title IV increased to $50 million and enabled SEC to grant
state law preemption
Regulation A+: Effective June 19, 2015

Unregistered Offering Exemptions

Feature

Public Crowdfunding
(Title III)

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Regulation A+
(Tier 1)

Regulation A+
(Tier 2)

Maximum Total $1 million per 12 month

Raised
period

$20 million per 12

$50 million per 12 month period;
month period; including including up to $15 million for
up to $6 million for
selling shareholders
selling shareholders

Number of
Investors

Unrestricted

Unrestricted

Unlimited but subject to

maximum total raised

Private Placements Including

Title II Crowdfunding
(Regulation D Rule 506 (b/c))
Unlimited

Unlimited accredited investors; up

to 35 non-accredited investors
unless soliciting (if soliciting- 0
non-accreds)

Investment Per Restricted by income/net

Investor
worth

Unrestricted

Investor
Disclosure

Required, must be filed Required, must be filed with SEC

with SEC

Not required if all accredited

investors; Form D filing proposed

Required, must be filed

with SEC

Restricted by income/net worth

Unrestricted

Intermediary
Required

Yes broker/dealer or
funding portal

No

No

No

Subject to
ongoing SEC
reporting
following raise

Yes, at least annually

No; as long as exit

report is filed not later
than 30 calendar days
after termination or
completion

Yes; audited financials filed

annually; annual, semi-annual,
current reporting required

No

May file exit report, so long as

issuer meets certain qualifications

Regulation A+ vs. Other Exemptions

Feature

Public Crowdfunding

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Regulation A+
(Tier 1)

Regulation A+
(Tier 2)

Private Placements
(Regulation D Rule 506 (b/c))

Disclosure Liability Yes, full disclosure

liability with a
knowledge exception

Yes, full disclosure liability Yes, full disclosure liability with a Only anti-fraud liability
with a knowledge exception knowledge exception

Shares restricted

No

No

Not exempt from state

securities law registration
and qualification

Exempt from state securities law

registration and qualification if
sold to qualified purchasers,
defined to include all offerees in
a Regulation A offering and all
purchasers in a Tier 2 offering;
notice filings, some in advance

State Filing

Yes, for one year

Notice filings

Yes, for public companies most

can sell under Rule 144 after
six months
Usually no if only offering to
accredited investors; notice
filings

Advertising and
Not allowed
general solicitation

"Testing the waters"

"Testing the waters" permitted
permitted before filing;
before filing; general solicitation
general solicitation
permitted after qualification
permitted after qualification

Allowed if sales are made only

to accredited investors and
issuer takes reasonable steps
to verify accredited status

Can public cos.,

foreign issuers,
investment
companies and
exempt inv.
companies issue

No public companies

Yes

No

No public companies

Feature

Regulation A+
(Tier 1)
Tier 1 shares count towards forced public cap
of 2,000 maximum holders/500 maximum nonaccredited (must also have $10 million of total
assets to be forced public) Tier 2 shares are
disregarded provided the issuer: continues to
make Tier 2 reports and is current in such
reports;
engages a transfer agent; and
has less than $75 million public float at end of
last semiannual period, or if no float, revenues
below $50 million as of most recently
completed fiscal year

Regulation A+
(Tier 2)
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Tier 1 shares count towards forced public cap of 2,000
maximum holders/500 maximum non-accredited (must also
have $10 million of total assets to be forced public) Tier 2
shares are disregarded provided the issuer: continues to
make Tier 2 reports and is current in such reports;
engages a transfer agent; and
has less than $75 million public float at end of last
semiannual period, or if no float, revenues below $50
million as of most recently completed fiscal year

Offering Circular

Form 1-A, filed publicly on EDGAR at least 21

days prior to solicitation; SEC clearance
required before sales can be made

Same at Tier 1

Exit, Annual,
Semiannual and
Current Event Reports

1-Z exit report 30 days after termination

1-Z Exit Report 1-K Annual Report

2,000 Stockholder
Forced Public Rule
(Section 12(g))

1-SA Semiannual Report

1-C Current Report

Financial Statements

Two years, audit not required

Two years, audit required

Sample Marketplace Lending Structure

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BPDN
Investors

SPV

rti Loa
cip n
at
ion
s
Pa

Monthly Payments

$
Borrower

GP

2
Platform

- Loan
- Collateral

- Borrower Payment
Dependent Notes
- Investment Agreement
- Private Placement
Memorandum

Loan
Participations

Fund
LP Investors

an ion
Lo ipat
c
rti

Pa

- Marketing
- Origination
- Licensing
- Loan Custody
Arrangements
- Servicing
Bills Borrower
Pays Investors

GP LLC

Sidecar
Investors

Regulation A+ and Marketplace Lenders

Equity or Debt
Can round out your investor portfolio
Offering must be Continuous
Recourse Notes or BPDN
BPDN have special considerations

Cost similar to credit facility

Time to qualification approx. 4 months
Remember ongoing filing requirements
Accounting
Liquidity considerations OTC or Nasdaq

Impact Investing | Manatt, Phelps & Phillips, LLP

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ABOUT THE PRESENTER

Impact Investing| Manatt, Phelps & Phillips, LLP

Brian Korn

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PROFESSIONAL EXPERIENCE
Brian S. Korn is a partner in the Capital Markets practice group and is resident in the New York
office. His practice focuses on corporate finance transactions, including initial public offerings (IPOs),
early-stage and start up venture financings, and mature corporate and high-yield debt finance. He
also advises clients on SEC compliance, broker-dealer compliance and corporate swap
transactions. He is also a recognized thought leader in the marketplace online lending (or peer-topeer lending) and crowdfinance fields and is a prolific speaker and writer in the field.

Brian Korn
Partner
Capital Markets
Peer-to-Peer Lending and
Crowdfunding
212.790.4510
bkorn@manatt.com

Mr. Korn has previously served as head of Equity Capital Markets and Syndicate Compliance at
Barclays Capital and as senior vice president and assistant general counsel at Citigroup Global
Markets, Inc. He has extensive experience representing issuers and underwriters in investment
banking and capital markets transactions, including transactions involving equity, debt, hybrid/
convertible and preferred securities, derivatives and foreign exchange. He has executed several
IPOs and other equity value monetization transactions, such as spin-offs, split-offs and carveout
transactions. He also has extensive experience in sponsor-leveraged buyouts and bank/bond
acquisition financing.

EDUCATION
Northwestern University School of Law, J.D., 1997.
Note and comment editor, Northwestern Journal of International Law & Business.
University of California, Berkeley, B.A., with honors and distinction, 1993.