Reg A versus Reg D - What is Reg A and Reg D?
Reg A vs Reg D
If you are looking to raise capital for your early-stage startup, then you may find all of the different crowdfunding regulations a bit overwhelming. There are a number of such regulations and they are all different, and what works for a growing, large company may not be ideal for a startup, so it’s a good idea to learn the difference between them. Reg A and Reg D are two popular crowdfunding regulations. Read on to learn the key differences between them.
Key Differences Between Reg A and Reg D Crowdfunding Regulations
The key differences between these two options lie in:
The amount of regulatory oversight
How much the offering costs
How much companies can raise under each
Who they can solicit their offering to. Let’s explore both regulations in detail
Let’s explore both regulations in detail.
Reg A was amended under Section 402 of the JOBS Act, this resulted in a two-tiered Regulation A+. Raising capital under Reg A is open to Canadian and U.S. issuers. There are no restrictions on the subsequent resales of the securities provided and general solicitation of the offering is also permitted.
Under Tier 1, a company is allowed to raise up to $20M in one year from accredited as well as non-accredited investors. On the other hand, under Tier 2, a company can raise up to $50M but there are certain investment limitations for non-accredited investors.
Both Tier 1 and Tier 2 differ in terms of certain filings with the SEC, e.g. an exit report, financial statements, the offering materials, etc. Reporting requirements for Tier 2 are slightly more stringent.
Who is Reg A Suitable for?
Because of the high costs involved, Reg A is generally a better option for more mature companies that have an active, large
Unlike a Reg A capital raise, a very limited number of non-accredited investors can participate in Reg D raise. This means Regulation D offerings are mainly available to accredited investors and because of this, they are exempt from certain registration as well as other requirements for a company selling equity. There are two options under Reg D: 506 (b) and 506(c).
Under 506(b), companies cannot publicly advertise or announce that they are raising capital with potential investors they don’t already know. This means they usually cannot solicit investors. On the other hand, under 506(c), companies are allowed to usually solicit, however, all investors must meet the accredited investor criteria.
Reg D is generally more appealing to companies because they don’t have to complete the extensive filings that are usually required under Reg A. Not to mention there are no limits on the capital amount a company can raise under Reg D.
Who is Reg D Suitable for?
Reg D is generally ideal for early-stage startups that are at Series A round of funding and who have started generating substantial user growth and significant revenue.
Nowadays, many platforms have the capability to conduct capital raise for startups via both Reg A and Reg D crowdfunding. If you are not sure what type of offering is best for you, then it is recommended that you seek the help of a crowdfunding consultant.