Three Mistakes to Avoid when Raising Reg A+ Money
On June 19, 2015, the new rules related to raising capital under Regulation A added into law. Tier II of Regulation A, which was made possible by Title IV of the JOBS Act, is better known as Reg A+ and sometimes referred to as “Equity crowdfunding” or “IPO-Lite”. Reg A+ is expected to have a significant impact on the way small and emerging businesses raise money for years to come. However, because of the newness of this law there are few examples that companies have to use as a benchmark. Because of this, it is expected that companies raising money under Reg A+ will make some mistakes. Here are three mistakes to avoid when raising money through a Reg A+ offering:
Not engaging a Securities Attorney at the beginning of the process.
Securities attorneys are going to be the backbone of a deal. While funding portals are expected to take over some of the compliance that securities attorneys use to take on, they will still be needed to review the compliance of deals, the language in solicitation materials, and the filings with the SEC. Before you start your Reg A+ solicitation, retain a securities attorney to help guide you. Raising money improperly comes with serious legal consequences. An attorney with public company experience is preferable as they will know how to handle filings with the SEC.
Thinking your audit will be done in a week and not retaining an auditor in advance.
Just like securities attorneys, auditors will be an important part of the Reg A+ process. What some people fail to realize, is that an audit, whether big or small carries risk to the auditor and takes time and care on their part. There is no one-size-fits-all audit to apply to every company. Actually, auditors are precluded from doing a rubber-stamp audit under their professional standards. Each audit is expected to be unique and targeted specifically for the client under professional standards. This is called a risk based audit. What people also don’t realize is that auditors are limited to the time they have. Engaging a good auditor and thinking that they can start tomorrow is foolish. Auditors plan weeks and sometimes months in advance for an audit so they can coordinate the appropriate resources. So if you are going through a Reg A+ funding, contact an auditor at the start so you can get on their radar. Check in regularly as the Reg A+ solicitation progresses and have the accounting records prepared before they start.
Ditching a predecessor entity and starting a new entity to raise money in.
This is a little known fact. Let’s say you own a fledgling tech company for five years. You finally get the technology to work at scale and want to raise money. However, the books and records of your company over the past few years are in shambles and all you can show is losses as far as the eye can see. So you form a new entity, contribute the IP and go raise money under Reg A+. What a great deal right? Wrong. Per Regulation C, Rule 405, when an SEC registrant (New Co) succeeds substantially all of the business of a previous entity (Old Co) and the operations of the New Co were insignificant compared to the operations assumed, the Old Co is considered a predecessor entity and is required to be consolidated for financial reporting purposes. However, this does not apply if there is a change in basis, which may occur when a third-party entity acquires the business (Old Co) in an acquisition. Bottom line is be careful and speak with your accountant and auditor before assuming a previous entity can be exempt.If you are a company raising money under Reg A+ keep up to date with any issues other companies are encountering and make sure to speak with experts to eliminate problems before they begin.