The “ABCs of Equity” can refer to the different regulations that enable startups to raise capital in the U.S. It can be important for anyone who is looking to raise capital or invest in private equity to understand these regulations. This blog will dive into the four most common types of private equity regulations: Regulation A, Regulation CF, Regulation D 506(b), and Regulation D 506(c).

Understanding the Equity Alphabet

Whether you are an entrepreneur looking to raise capital for your business, or an investor looking for opportunities in private equity, understanding the ABCs of Equity can help you make informed decisions. If you are a startup looking to raise capital, it is important to understand the regulatory requirements and costs associated with each option, as well as the potential benefits and limitations.

The main differences between Reg A, Reg CF, and Reg D fall under the following:

How much money can be raised?
Who can the issuer solicit the investment to?
Who is eligible to invest?
How much does the offering cost?
The amount of regulatory oversight

Regulation A

Regulation A, also known as Reg A, was amended as part of the JOBS Act into two tiers that differ in the maximum amount of money that can be raised and certain disclosure requirements. Reg A has become colloquially referred to as a mini-IPO without going public due to the ability to raise large amounts of capital from accredited and non-accredited investors without going through the traditional IPO process. General solicitation is permitted for Reg A offerings.

As a refresher, accredited investors are entitled to access such investment opportunities if they satisfy at least one requirement regarding their income, net worth, assets, governance status, or professional experience. These investors typically have a net worth of over $1 million or an income of $200,000 or more per year or meet other requirements.

Tier 1

Tier 1 of Reg A allows private companies to raise up to $20 million in a public offering in a 12-month period. Unlike traditional IPOs, a Reg A offering does not require the company to go public, but it does require the company to file an offering statement with the SEC and provide ongoing reports to investors. The disclosure requirements for Tier 1 offerings are less stringent than for Tier 2 offerings.

Tier 2

Tier 2 of Reg A allows private companies to raise up to $75 million in a public offering in a 12-month period. In addition to the requirements from Tier 1, companies must also provide audited financial statements and comply with the same ongoing reporting requirements as publicly traded companies. There is also a limitation to how much capital a non-accredited investor may invest in this offering.

Who is Regulation A Best For?

One of the benefits of Reg A is that it allows companies to reach a larger pool of potential investors, including non-accredited investors. This means anyone can invest in Reg A private companies and potentially participate in the benefits of early-stage investing. Reg A is generally for more mature companies that have a large, active audience and who are seeking capital to fuel growth.

Regulation CF

Regulation Crowdfunding (Reg CF) is another provision of the JOBS Act that allows companies to raise capital from the public. Unlike Reg A, Reg CF has a much lower maximum raise amount of $5 million in a 12-month period. Reg CF offerings primarily open the window for non-accredited investors to make investments in private companies, but accredited investors can participate in Reg CF raises. General solicitation is also permitted in certain circumstances under Reg CF.

Who is Regulation CF Best For?

Early-stage companies who tend to raise through Reg CF are typically between the Seed and Series A funding stages and have a minimum viable product (MVP) plus early customer feedback. The process of conducting a Reg CF offering is relatively simple and straightforward, which can make it an attractive option for companies that do not have as many resources or are looking to raise a smaller amount of capital. Companies that have a large base of passionate fans are generally interested in this type of raise.

Regulation D

Reg D offerings are generally only available to accredited investors so they are exempt from certain registration and other requirements for a company selling equity. Under Regulation D there are two options:

506(b)
506(c)

Regulation D 506(b)

Reg D 506(b) is a safe harbor under SEC Rule 506 that allows companies to raise an unlimited amount of capital from accredited investors without registering the securities with the SEC. One differentiator of Reg D 506(b) is that it can provide companies with a simpler and less expensive alternative to a public offering. Unlike a Reg A or Reg CF raise, accredited investors and, depending on the issuer, a very limited number of non-accredited investors can participate in a Reg D 506(b) raise. Regulation D 506(b) does not permit general solicitation.

Regulation D 506(c)

Reg D 506(c) is similar to Reg D 506(b), but unlike Reg D 506(b), it does allow companies to solicit investors publicly. This means that companies can advertise their offerings to the general public, but they still can only sell securities to accredited investors and must verify that they are accredited. Another difference between 506(b) and 506(c) is that only accredited investors may invest in these offerings.

Who is Regulation D Best For?

Offerings under Reg D are generally for early-stage startups that are at Seed or Series A rounds of funding and who have been generating significant revenue and/or user growth.

Here is a high-level recap of what has been discussed throughout the blog:

Final Thoughts

There are a variety of options for companies looking to raise capital. Reg A, Reg CF, Reg D 506(b), and Reg D 506(c) each have advantages and disadvantages. Startups may want to carefully consider their options before deciding which regulation they might want to pursue to raise capital. The best option for any company will depend on its specific circumstances, such as the amount of capital it is looking to raise, the type and number of investors it is looking to reach, as well as its resources and capabilities.

A company may want to seek the guidance of legal and financial professionals to help them through all relevant laws and regulations. If you are an investor, it is important to understand the risks associated with private investments and to do your due diligence before investing.

Want to learn more about investing with equity regulations? Check out the following MicroVentures blogs to learn more:

Currently, MicroVentures has the capability to conduct raises for startups through Reg D, Reg A, and Reg CF. If you’re interested in raising money for your startup, you can apply to raise capital. If you’re not sure what type of offering is best for you, we’re happy to discuss which option may be best suited for your business.

APPLY TO RAISE CAPITAL

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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The ABCs of Equity