914 See Dambra, M., L. Field, and M. Gustafson, 2014, The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision, Journal of Financial Economics (forthcoming), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459591.
915 See Chaplinsky, S., K. Hanley, and S. K. Moon, 2014, The JOBS Act and the costs of going public, Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2492241; Barth, M., W. Landsman, and D. Taylor, 2014, The JOBS Act and information uncertainty in IPO firms, Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2465927; Westfall, T.J., and T. C. Omer, 2014, The impact of emerging growth company status on initial public offering valuation and the associated auditor risk and effort, Working paper, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2512605.
916 See Berger, A., and G. Udell, 2006, Small business credit availability and relationship lending: The importance of bank organisational structure, Economic Journal 112(477), pp. 32–53. In this study, equity accounted for approximately half of the total capital, including approximately 31% (45% for the smallest firms—that is, those, with less than $1 million in revenues or less than twenty employees) attributed to the principal owner. The remainder came from debt financing, with about one quarter accounted for by loans from commercial banks, finance companies and other financial institutions, and another 16% comprised of trade credit. The study was conducted based on the 1993 edition of the Federal Reserve Board’s Survey of Small Business Finances, which collects information on small businesses in the United States.
917 See Robb, A., and D. Robinson, 2014, The capital structure decisions of new firms, Review of Financial Studies 27(1), pp. 153–179.
technology or life sciences startup, without steady revenues or substantial tangible assets is likely to have trouble obtaining a loan or a line of credit from a bank because it would have difficulty proving its ability to repay. Financial institutions generally require such small business borrowers to provide collateral or a guarantee by owners,918 which some issuers may be unable or reluctant to provide.
Investors
There are currently no limitations on who can invest in existing Regulation A offerings. In considering the baseline for the amendments to Regulation A, we also examine the investors in other existing methods of raising up to $50 million in capital because the final rules we are adopting may impact an issuer’s choice of offering method and the potential investor base of the offering. For example, as discussed above, while there are no limitations on the number of non-accredited investors that can invest in offerings made pursuant to Rule 504 of Regulation D and in registered public offerings, offerings made pursuant to Rule 505 and Rule 506(b) of Regulation D are limited to a maximum of 35 non-accredited investors. Issuers making offerings pursuant to Rule 506(c) of Regulation D must take reasonable steps to verify that investors are accredited investors.
While non-accredited investors can participate in Regulation D offerings, subject to limitations described above, data from Form D filings suggests that non-accredited
918 Approximately 92% of all small business debt to financial institutions is secured, and owners of the firm guarantee about 52% of that debt. See Berger, A., and G. Udell, 1995, Relationship lending and lines of credit in small firm finance, Journal of Business 68(3), pp. 351–381. Some studies of small business lending also document the creation of local captive markets with higher borrowing costs for small, opaque firms as a result of strategic use of soft information by local lenders. See Agarwal, Sumit, and Robert Hauswald, 2010, Distance and private information in lending, Review of Financial Studies 13(7), pp. 2757–2788.
investors are not significantly involved in Regulation D offerings of up to $50 million. Offerings involving non-accredited investors are typically smaller than those that do not involve non-accredited investors. In 2014, we estimate that approximately 152,641 investors participated in Regulation D offerings of less than $50 million by issuers that would be eligible for amended Regulation A.919 Such offerings had an average of 13.6 investors per offering. Approximately 8% of such offerings involved one or more non- accredited investors.
The total number of households estimated to qualify as accredited investors is substantially larger than the total number of investors reported to have participated in an unregistered offering. As of 2013, we estimated that over 9 million U.S. households qualified as accredited investors based on the net worth standard alone, approximately 8 million U.S. households qualified as accredited investors based on the income standard alone, and approximately 12.4 million U.S. households qualified based on either the
income standard or the net worth standard.920