May 11, 2023

Small Business Capital Formation: Reg A Trends

A recent study from a Marquette finance prof examines trends in Reg A offerings post-JOBS Act. This is useful since one of the goals of the JOBS Act was to make Regulation A a more viable option for capital raising by smaller companies, by significantly raising the maximum offering size and turning it into what became known as “Reg A+”.

The study shows that Reg A has become more popular since the JOBS Act was enacted. The number of qualified filings increased from an average of eight per year before the Act to over 160 annually in 2022. However – possibly due to continued perception of high offering costs, or just a general lack of awareness – Reg A is still an underdog when it comes to capital raising alternatives.

The study provides some insights & trends on qualification that may help anyone considering this route, and suggests ways that policy-makers can continue to help Reg A be all that it can be. Here are a few key data points, from this CLS summary:

Number of Filings per Year: The number of filings increased over time (especially Tier 2 offerings), with a peak of 274 filings in 2021 (see Figure 2). (Tier 1 Reg A offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 Reg A offerings allow companies to raise up to $75 million in a 12-month period, but also have additional disclosure requirements and ongoing reporting obligations.)

Percentage of Qualified Offerings by Year: The percentage of offerings qualified by the SEC increased from 39 percent in 2015 to 78 percent in 2022.

Offering Size Distribution of Qualified Offerings: The average offering size of qualified offerings was $22 million, with a range of $1.5 million to $75 million. Larger offerings were positively associated with SEC qualification, indicating that issuers who align their offering size with their financial fundamentals are more likely to obtain SEC qualification.

Use of Professional Advisers in the Registration Process: The use of professional advisers, such as lawyers and accountants, was positively associated with SEC qualification. Issuers who engage professional advisors earlier in the process likely signal a higher level of competency to the SEC.

Industry Distribution of Qualified Offerings: The technology sector had the highest number of qualified offerings, followed by healthcare and consumer goods.

See our “Regulation A/A+” Practice Area for more resources on this exemption.

Liz Dunshee