How are Regulation A+ and Equity CrowdFunding different?
Where does your company fit with the new SEC Equity CrowdFunding rules?
The SEC just published new rules that expand Equity CrowdFunding to allow main street investors to invest in private startup companies, as a key part of the JOBS Act (they will be effective at the end of January 2016). In March, the SEC also published groundbreaking new rules called Regulation A+ or Reg A+ for short (effective July 2015).
The capital raising landscape has now seen its biggest shift in decades. I now see a fund raising continuum using online platforms that extends from startups raising seed capital of as little as $100k up through established companies raising up to $50 million* per year per company.
US entrepreneurs have never had it so good. Let's explore the new ecosystem and see what path suits which companies best. (I am deliberately condensing this guidance for the sake of clarity. There are many great sources for comprehensive detail on this topic, and I am also expressing my views here).
“Wide” Equity CrowdFunding (also known as Title III): Startups raising $100k up to $1 mill in seed capital fit newly expanded mainstreet Equity CrowdFunding nicely. This means that mainstreet investors (both accredited and non-accredited individuals) worldwide can now buy shares in your company. The smaller the capital raise, the less demanding the disclosure rules are, with break points at $100k and $500k. Expect many of the existing Equity CrowdFunding platforms to expand to include main street investors. Effective date May 14th 2016.
Accredited Equity CrowdFunding (Title II): Startups raising $1mill to $4mill fit the existing style of equity crowdfunding platforms, raising capital from accredited (wealthy) investors. Think Fundable, CrowdFunder, Angellist, EquityNet, and CircleUp as examples of this, (there are many more good ones).
Regulation A+ (Also known as Title 4) : Successful mid stage companies, corporate spinouts (think management buyout), companies considering a reverse merger with a public shell, and select, low risk, large upside startups - fit Reg A+ platforms. You can raise up to 50 mill* per year using Reg A+. You could do your own offering, or you can use one of the funding platforms that exist today examples are DigitalOffering, SeedInvest, StartEngi, ManhattanStreetCapital and FundAthena. Shares can be liquid immediately after the offering.
In all forms of online fundraising/CrowdFunding:
You will need to make a compelling pitch for your business and the use of the capital you intend to raise, effectively explain your market, why it's big enough to justify investing in, the barriers to entry that you have built in to your business and why your company will survive competition in the long haul.
Be prepared for open disclosure. You have to be open and avoid hype in order to have a good chance of getting investor engagement and investment. Expect thousands of investors to be examining your every claim, your LinkedIn profile, and your career to date.
Now is the time, and the opportunity to raise risk capital for US businesses has never been greater. We can expect tremendous evolution in the funding landscape as the result of the new expansion of online capital raising options for US entrepreneurs.
*For businesses that can segment their market by geographic regions, it is possible to make multiple simultaneous offerings for one entity.
For example, let's say a company is planning to buy a series of businesses and add value to them for future sale at a profit - Private Equity is a good example. A company can establish say six regions of the US and raise capital for each region simultaneously using a dedicated Reg A+ for each region. In this example, the maximum per year would be 6x50 = $300 million per year.
See this short video: