Since the JOBS Act was passed in 2012, RegA+ has evolved tremendously. With companies able to raise up to $75 million and utilize methods of online capital formation, the market continues to grow as more companies turn to the exemption to fund growth. Yet, the need for improved liquidity for this asset class has been given little attention by lawmakers and the Securities and Exchange Commission.
Without secondary trading, investors are left with few options. Traditionally, private securities only provide an off-ramp for investors in the event of a merger, acquisition, or IPO. The unfortunate reality is that while a fragmented regulatory environment does allow for some secondary market transactions, issuers are not pre-empted from state securities regulations. As a member of the Small Business Capital Formation Advisory Committee, Sara Hanks recently spoke to highlight the challenges issuers face. “The end result is it becomes very difficult to trade companies,” said Sara, founder of Crowdcheck. And for the companies that she works with, it does not generally work for them.
Many believe the SEC should allow pre-emption for securities issued under Tier 2 of RegA+, supporting secondary market trading. The consensus of the committee was that the SEC should act on this recommendation and make secondary trading available for securities issued under Reg A+. Otherwise, small businesses will continue to suffer, and investors will be faced with limited opportunities for liquidity.
The committee also said it would be worthwhile for the SEC to consider harmonizing rules between Reg A+ and crowdfunding offerings to provide more clarity and simplicity for companies that rely on both forms of funding. If a solution to secondary trading is not found, it could limit the amount of money raised under Reg A+ and make it harder for small businesses to get the funding they need to grow.
Based on the recommendation of the Small Business Capital Formation Advisory Committee, the SEC should allow pre-emption for securities issued under Tier 2 of Reg A+. Pre-emption would enable small businesses to access the capital they need to grow and thrive.