The difference between securities offerings, explained

The securities markets have seen a number of shifts and upheavals in the last decade. The term “securities” used to be exclusively associated with traditional financial instruments like stocks and bonds, but it has grown to include most any type of investment offering, such as alternative assets like real estate, whiskey, crypto, and NFTs. In this rapidly changing landscape, what sort of protections are in place for investors? And what options are available to companies that want to raise capital?

Read on to find out.

What is an accredited investor?

“Accredited investor” is a classification defined by the U.S. Securities and Exchange Commission (SEC). The title is assigned to investors the SEC deems qualified to purchase unregistered securities based on their financial stability and/or sophistication. The accredited classification can also be thought of as a means to protect less well-off investors – because unregistered securities don’t come with as many disclosures, they are inherently riskier. Sellers, therefore, may only advertise and sell these investment vehicles to the legally authorized accredited investor pool.

Criteria for becoming an accredited investor

In order to be considered an accredited investor as an individual, you must meet one of the following financial criteria:

• A net worth of over $1 million, not including your primary residence;

OR

• A combined net worth of over $1 million with a spouse or partner, not including your primary residence;

OR

• An income of over $200,000 in each of the previous two years, with the reasonable expectation that your income will remain the same for the current year;

OR

• An income of over $300,000 with a spouse or partner in each of the previous two years, with the reasonable expectation that your combined income will remain the same for the current year.

Certain professionals may also qualify as accredited investors:

• Any “family client” of a “family office” that qualifies as an accredited investor;
• Executive officers, directors, and/or general partners of the company selling the securities;
• Executive officers, directors, and/or general partners of a general partner of the company selling the securities;
• Investment professionals in good standing who hold a Series 7, Series 65, or Series 82 certification;
• “Knowledgeable employees” of a private fund.

Corporate entities may be considered accredited investors in their own right. For more information on who and what is qualified to invest in exempt offerings, check out the SEC website.

The JOBS Act: an overview

The Jumpstart Our Business Startups (JOBS) Act was signed into law in April 2012 by then-President Barack Obama. Its primary function is to boost job growth and make investing in startups easier on both sides of the transaction. Early stage companies looking for funding no longer face as many restrictions on their reporting and advertising; in particular, those with under $1 billion in revenue aren’t required to provide as much information to investors. On the investor side, it brought non-accredited investors into the startup investment mix.

Impact of the JOBS Act on startup investing

Before this piece of legislation, investing in startups was strictly limited to accredited investors. Now, non-accredited investors are allowed by law to participate in certain Regulation A offerings as well as equity crowdfunding. This greatly expanded the pool of capital available to new entrepreneurs and existing companies looking for funding. In addition, the JOBS Act changed the means by which startups can court investors. Under Title II of the law, companies can now publicly advertise securities offerings to accredited investors.

Different types of securities offerings

Let’s take a look at some of the different types of offerings a company might use to raise capital.

Regulation A+

Regulation A+ (Reg A+) is an amended version of the Regulation A exemption originally defined under section 3(b) of the Securities Act of 1933. You can think of a Reg A+ offering as a mini-IPO. The filing company is allowed to offer securities, but doesn’t have to go through the full process of registering with the SEC, which can be time consuming and expensive. The amendment of the Reg A exemption has coincided with a dramatic increase in the number of qualified Reg A offerings, with a little over $1 billion in aggregate reported proceeds in 2019 alone.

There are two possible tiers for a Reg A+ offering. Tier 1 allows a company to raise up to $20 million in a one-year period, including up to $6 million in affiliate secondary sales. Both accredited and non-accredited investors may participate, and there are little to no ongoing auditing or reporting requirements.

Under Tier 2, a company may raise as much as $75 million in 12 months, including up to $22.5 in affiliate secondary sales. However, this higher funding cap comes with more regulatory obligations. There are limits on how much non-accredited investors can contribute, and the filing company must adhere to regulations around their annual reports as well as submit their financial statements to auditing.

Regulation D

SEC Regulation D (Reg D) gives smaller companies another means to raise capital by way of a private offering of equity or debt securities. (This is not to be confused with Federal Reserve Board Regulation D, which limits withdrawals from savings accounts.) Reg D offerings do not require the securities to be registered with the SEC, but buyers are still protected under all applicable securities laws. In addition, the company making the offering must file a Form D disclosure document with the SEC after the first securities are sold.

Like Reg A+ offerings, Reg D offerings have seen a dramatic increase in popularity. From 2009 to 2019, $13.6 trillion was raised through these types of offerings. From 2017 to 2019 in particular, Reg D proceeds surpassed the aggregate amounts raised by means of registered offerings of debt and equity.

Regulation crowdfunding

Regulation Crowdfunding (Reg CF) is the newest and most accessible type of securities offering for retail investors. Title III of the JOBS Act allows private companies to raise up to $5 million by offering equity or securities for sale to the general public. Yes, that’s right – anyone can buy a stake in a startup making a Reg CF offering. Reg CF reporting requirements are also even more lenient than Reg A+ requirements, so companies can raise capital incredibly efficiently.

How these regulations impact FranShares

We’re in the business of disrupting and democratizing the franchise investing space, but we also want to make sure we’re protecting our clients in the process. To that end, we’re working with digital asset securities firm Securitize to ensure we follow all federal and state regulations pertaining to the investment vehicles we offer. Securitize itself is a member of both FINRA and  SIPC, as well as registered with SEC. 

In the near future, we plan to offer various franchise funds that enable investors from all walks of life to grow and diversify their portfolios. To learn more about FranShares and this unique opportunity, speak to our Investor Relations team.