Crowdfunding for startups and other growing businesses recently became more democratic. In June of 2015, Regulation A+, or Title IV of the JOBS Act, made it possible for any American to invest in a private growth-stage company. Prior to this enactment, only the wealthiest Americans who represented just 2 percent of the population were able to put up money to help private companies grow (and then see the return on that investment).
Under Regulation A+, private companies can accept up to $75 million from the general public and can offer those investors shares of their company.
Why Choose Reg A+?
By seeking out Regulation A+ funding, companies have some clear advantages. The first and most obvious is that the pool of people who are available to invest grows tremendously. Going from 2 percent to 100 percent of the population as your potential investors is clearly a plus. In the past investors in private companies were required to be accredited investors (wealthy) - a term that comes with stringent financial rules. Regulation A+ offerings welcome funding from accredited and non-accredited investors.
Reg A+ offerings also come with lower fees than a traditional IPO. The disclosure mandates for Regulation A+ offerings are also less demanding than traditional IPOs, which saves time and also makes it easier to have consistent, accurate reporting that abides by investment laws.
What specific advantages are there to Regulation A+ offerings?
This type of funding comes with some serious advantages for both the growth-oriented companies and the investors involved. A few includes:
- Company control. When smaller amounts of capital are raised from a large pool of investors, the startup is able to remain the majority stakeholder. Accredited investors often want some company control before investing but that downside is mitigated when investors are simply looking for a return on investment without any control.
- Brand ambassadors. Consider investors as individual spokespeople for the company. They are clearly excited about what the company has to offer and they will share that with the people they know. That word-of-mouth marketing could be just what a company needs to springboard into its market.
- Brand testing. Those committed investors will likely want to use the products - and will give feedback based on how their experiences go. Companies can tweak what they sell based on what they hear from investors.
- Rapid capital. With a smaller amount of shares per investor, there is less courtship of funds which means a faster road to funding. Since the Regulation A-plus market is still so new, there is a level of enthusiasm and eagerness that may also be to the advantage of companies who go this route.
Is my company a good fit for Reg A+ funding?
Not all growth-phase companies should seek out Regulation A+ offerings but it can certainly be a boon to the business if the company fits these criteria:
- Significant user base. Startups that already have fans can tap that interest to help raise funds. These are people who already believe in what you have to offer -- and may even feel privileged to get to participate in crowdfunding.
- A desire to raise at least $3 million. The ideal range for using Regulation A+ funding is for companies who want to raise from $3 million to $75 million. Anything under that may make more financial sense to take the pre-existing routes.
- Consumer-facing. The average public is going to be more excited about a product that he or she can use and encourage others to use also. This is why business-to-business products or services are best suited to traditional IPO routes or accredited investor financing for the time being, until Regulation A plus is more widely known.
- Marketing-heavy approach. As mentioned earlier, using Reg A+ funding allows a company to reach a wider audience and get them talking about the products. By having more investors involved, more buzz will be generated which is a bonus in addition to the actual funding.
In short, Regulation A+ funding can really be a smart move if the above criteria is met. Are you ready to grow your business through a Reg A+ offering?
Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure, and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves, and eASIC.
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