Access to reliable and efficient capital is a crucial factor in the growth of any small business. For many, the advent of equity crowdfunding has begun to provide workable solutions, under particular conditions, where small and medium sized businesses can gain more access to investor capital than ever before. Unfortunately, for almost the past century, the rules have required that only accredited investors (or individuals who make more than $200,000 in income, or have $1 million in assets), could invest in American startups. However, after a lengthy time spent in Congress, regulations have finally been introduced that allow any person interested in investing in a business to offer capital through equity crowdfunding.
On March 25th, the Securities and Exchange Commission (SEC) announced the arrival of a final set of rules intended to make accessing investor capital through crowdfunding easier for smaller companies, while providing investors with more choices on how to use their money. These updated rules, known as Regulation A+, are an expansion on the existing Regulation A guidelines passed by the JOBS Act of 2012.
What is Regulation A+?
The Regulation A+ securities regulation is a revamped concept that companies can use to raise anywhere up to $50 million in capital from both non-accredited and accredited investors alike. Traditionally, funding such as Regulation D, or Rule 506 (b) offerings required consideration of only investment from accredited investors. Although this offered some form of protection for those involved, it also meant that over 97% of Americans were not permitted to invest in startup businesses, even if they understood the liquid capital they needed to deploy, and the risks they were taking.
Now, in addition to the introduction of Regulation A+ the ecosystem for crowd-finance has continued to mature with multiple new options for giving startups capital. For example, while reward-based crowdfunding is still identified as the most compelling option for certain young companies, equity crowdfunding is also offering several different approaches to consider.
While Regulation A has been around for some years, the previous rules made it highly inefficient. Indeed, the Securities and Exchange Commission discovered that a maximum of 26 offerings took place every year, with an upper funding limit of $5 million. With Regulation A+ however, companies can raise up to $20 million in tier 1, and $50 million in tier 2.
How Does A+ Connect to Crowdfunding?
Engaging a Regulation A+ offering means that everyone from your postman to your hairdresser can invest in your business. It provides a complimentary addition to how the typical process for fundraising unfolds by introducing a wider crowdfunding platform.
Unfortunately, it's important to recognize that raising money under Regulation A+ can be complex, as the SEC still has many rules surrounding the way in which private securities sell to the general public. As they begin to reduce restrictions on who can invest, the amount of documentation you may need to provide will also increase. For instance, to apply for a Regulation A+ offering, your company will need to be incorporated within the United States, should be prepared for a Series A or later stage offering, and must have all the required documentation for fundraising.
However, with everything in place, many experts agree that the new rule could allow for a much greater percentage of private startups to access investment money through the concept of crowdfunding. While many venture capitalists and angel investors search only for investment opportunities to make money, this new Regulation A+ offering will allow businesses to appeal to investors who simply believe in the value of the product or service offered. In other words, fewer small businesses will be ignored when it comes to funding opportunities.
What Does It Mean For The Future?
With the new Regulation A+ rules in place, more entrepreneurial spirits should be able to find new ways of accessing equity funding. For example, local diners may find capitol from customers and community members who believe in the business and want to keep it running. The opening up of investment opportunities will provide a huge shift in the funding paradigm as we know it.
What's more, the alterations are likely to have a positive effect on the U.S. economy, as around 65% of new jobs are created through small businesses. Regulation A+ and crowdfunding solutions could make the world of business and consumerism a more interconnected place for everyone involved.