The Securities Act of 1933
In 1929, the worst economic downturn in modern history, known as The Great Depression, began. Though there is not one, specific cause, overconfidence from the booming 1920s led everyone–from millionaires to janitors–to buy in on the market. Ordinary people bought stock on easily obtained credit they were unable to pay back. This behavior kept stock prices rising, and eventually, investors sold off overpriced shares en masse. Finally, in October 1929, there was a sudden stock market crash. Confidence in markets was erased, consumer spending dropped, and unemployment skyrocketed.
By 1932 almost 15 million Americans were unemployed and half of all banks were failed. Tired of insufficient support from the government, citizens elected President Franklin D. Roosevelt in 1932 to implement his historic “New Deal” reforms. Reform programs included the Social Security Act and financial protection agencies like the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC). The Securities and Exchange Commission implemented the Securities Act of 1933. The Securities Act requires companies seeking capital investments to formally register with the SEC. The requirement provides investors with company knowledge needed to make sound investments and reduces fraud.
In addition, the Securities Act of 1933 defined which investors are eligible to participate in certain securities offerings. Accredited investors with a net worth over $1 million are expected to be more experienced, and therefore, are able to invest in companies exempt from some financial reporting standards, such as companies qualified under Regulation D of the Securities Act. Non-accredited investors (net worth under $1 million) are limited in which companies they can buy securities from. These limitations are in place to protect non-accredited investors because they are deemed less likely to afford and understand large, risky offerings.
Later acts, such as The Securities Exchange Act of 1934, helped solidify enforcement of conduct in markets. Leading up to the 1929 crash, under-qualified investment advisors gave poor advice to under-qualified people who then invested heavily in markets. Thus, further protections were added in 1940 with the Investment Company Act and Investment Advisors Act. These acts placed requirements and obligations on mutual fund companies to “mitigate and … eliminate the conditions … which adversely affect the national public interest and the interest of investors.”
To stimulate further economic growth, Regulation A of the 1933 Securities Act exempted smaller investment companies from rigorous and expensive registration requirements. Regulation A also made sure everyday people (non-accredited investors) could receive vital company information needed to make informed investment decisions. Though some regulations restricted market conduct in order to protect investors, regulations like Regulation A helped democratize the investment industry by granting financial access and opportunity to more citizens. After the economic downturn in the 2000s, efforts to make investing open and transparent were intensified.
The Introduction to Reg A+
In response to a hurting economy after the financial crisis of 2007-2008, the 2012 Jumpstart Our Business Startups (JOBS) Act was enacted to promote economic growth and job creation. The JOBS Act decreased general regulation and included a focus on start-up companies by “improving access to the public capital markets for emerging growth companies.” In addition, the JOBS Act directed the SEC to revise Regulation A exemptions. By March 2015, the SEC finalized new rules to expand Regulation A into what is now known as Regulation A+. The expansion of Regulation A has opened new opportunities for individuals and companies across the country.
Traditionally, companies wanting to raise more than $5 million could only register offerings under Regulation D. Regulation D has no limit on the raise amount and is offered almost exclusively to accredited investors. This meant that anyone making less than $200,000 per year (non-accredited investors) was unable to participate in large wealth-building opportunities. Now, Regulation A+ allows companies seeking up to $50,000,000 to sell securities to both accredited and non-accredited investors without a costly registration.
Companies must file an offering under one of two tiers:
Tier 1: acting more as a revision to the original Reg A, the maximum offer amount is raised from $5 million to $20 million in any 12-month period, and most of the original exemption requirements are retained
Tier 2: written as a new rule, the maximum offer amount is $50 million in any 12-month period, but with these new exemptions, the company doesn’t need to qualify with state securities regulators.
Along with changes in the amount of eligible capital, the SEC also revised reporting requirements. Companies indicating an offer under Tier 1 are not required to produce continuous reports on the status of the offering, and only need to file an offering circular and final status report with the SEC. Though state registration is not required, Tier 2 does require companies to produce continuous reports on the offering status along with independently audited financial reports. Necessary forms for Tier 2 include audited semi-annual reports on the financial status and future outlook of a company. Continuous reports are warranted due to the higher capital investment ask.
Regardless of tier, registration begins with a U.S. or Canadian company submitting a Form 1- or draft of an offering statement. Before filing any offering statement, Regulation A+ allows companies to market online and solicit interest in offerings to determine viability. By doing this, anyone can find out about emerging opportunities, and with modern access to financial education, non-accredited investors can learn skills to navigate large funds responsibly. The substantial increase in access to investment opportunities begins the democratization of wealth-building and creates a culture of economic growth. Though it is thought to only constrict opportunity, increased access to investments and capital could only be instituted through increased regulation.
Regulation A+ vs. Traditional IPO
Regulation A+ funds, like traditional IPOs, can receive capital from accredited and non-accredited investors. The difference is that Reg A+ funds can access an unlimited number of investors, while traditional Regulation D offerings have restrictions for non-accredited investors.Tier 2 is often known as a “mini IPO” since legal, accounting, broker-dealer, and marketing costs are less expensive than a traditional IPO and both offerings can be listed on securities exchanges such as NASDAQ or NYSE.
Regulation A+ vs. Regulation CF
Regulation Crowdfunding, or Title III under the JOBS Act, was adopted in May 2016 to once again expand access to capital. Though similar to Regulation A, Regulation CF permits a company to raise a maximum of $1,070,000 over a 12-month period. All transactions under Regulation CF must take place online through an SEC-registered intermediary or funding portal. With a much lower maximum raise limit, Reg CF is more popular among younger companies with lower valuations and brand-new investors. Reg A+ is geared towards more established companies looking to grow with more capital and attracts more serious investors.
Housing Joint Venture Funds
Regulations known to restrict have ultimately expanded access to capital and wealth while maintaining investor security. Reporting exemptions enable a faster securities process, so investors and companies are able to rapidly grow new ideas and developments across industries. Real estate has recently gained popularity among Reg A+ funds since many non-accredited investors are attracted by tangible, easily understandable, and valuable assets. Housing Joint Venture is an opportunity for driven individuals seeking education, community, impact, and return to become involved with peers and real estate developments across the country. Housing Joint Venture currently operates under Regulation D Rule 506 and is open to accredited and non-accredited investors looking to diversify their portfolio and impact communities. By reducing our minimum investment from $7500 to $500 with a Reg A+ fund, Housing Joint Venture will impact several growing markets, in which any investor can be a part of. Learn more about our offerings at www.housingjv.com. Join our newsletter to be one of the first to join our future Reg A+ fund.