Published May 03, 2016
Many in the entrepreneurial ecosystem are excited about the new Regulation A+ rules that were recently passed by the SEC as part of the JOBS Act. Regulation A+ is an update to an old provision of federal law that wasn’t working (the original Regulation A allowing companies to raise up to $5 million dollars by selling their securities to the public). This makeover is welcome, as it increases to $50 million the amount entrepreneurs can raise, and eases one of the most onerous provisions, the Blue Sky registrations, which required an offering to be registered in each state in which the securities are sold.
But while this recent regulatory update does mean new funding possibilities for companies, it is important to understand that this avenue is not an ideal funding path for young ventures. There have been many articles touting this opportunity for “small businesses and startups” but one cannot downplay that raising capital under this exemption means a venture will then be a public company -- and it comes with all the costs, compliance and distractions that this implies.
Additionally, in the competitive business landscape, it may not be appealing to have to publicly disclose company financials and other sensitive information to the public as is required as part of the process. A company really needs to be ready -- preferably venture backed and generating substantive revenue -- before considering this option.
“What we don’t want to see are companies going public before proving their business model," says Dara Albright, a leader in the crowdfunding industry. "We will just bring back the problems we had with the pink-sheets and penny stock companies that troubled regulators. But Regulation A+ could be a good replacement for reverse mergers, PIPE’s and the small cap IPO.”
In addition to Regulation A+, the crowd-finance ecosystem continues to mature with multiple paths to capital, including the following:
This is still the most compelling alternative for startups and young companies, as it not only results in an infusion of capital without taking on debt or having to value a company prematurely to structure equity, but it also allows entrepreneurs to get early product feedback and secure new customers and marketing benefits.
This is an attractive choice for companies that have revenue and may be in need of short-term capital to purchase equipment or fund inventory. There are a growing number of lending platforms that offer a variety of loans such as revenue secured, asset based or term. There are also some platforms that offer revenue sharing as yet another financing model.
This method offers several approaches. It encompasses the traditional Regulation D 506 (b), which allows entrepreneurs to raise an unlimited amount of capital from both accredited investors and up to 35 unaccredited investors, to the newer Regulation D 506 (c), which allows for advertising the offering but limits the resulting investors to only those who are accredited (advertising is prohibited under the traditional Regulation D 506 [b] approach).
With 18 states having already adopted an Intrastate Crowdfunding Exemption, which allows small investment offerings of typically $1 million or less to be sold to the public within a state (without having to register the offering with the SEC), this is also a path worth exploring.
So while the new Regulation A+ rules are promising for later stage ventures, and exciting for the millions of Americans who can now invest in innovative private companies, this path is more costly, time consuming and comes with many more requirements than the existing crowdfunding options. Every business needs to understand the benefits and obligations that come with each funding model and evaluate which is the best fit for them.