On March 25th, 2015, the government body in charge of regulating equity and debt crowdfunding known as the Securities and Exchange Commission (SEC), made final rules related to Title IV of the 2012 Jobs Act known as Regulation A+. These rules have a profound impact on the capital raising industry today, specifically in the crowdfunding movement, as they now pave the way for startups and small businesses to raise capital directly from the general public, not just wealthy people known as accredited investors. Then, approximately 3 months later, the new regulation went LIVE on June 19th and the very first entrepreneurs were able to use this amazing rule in capital formation.
To truly understand the dramatic impact that this holds, it helps to know how things occurred since the passage of the law that allows for equity and debt based crowdfunding operated. The 2012 Jobs act had 7 provisions within the law that has changed how fundraising and capital markets is being done today. Of the 7 provisions, 3 of them related to crowdfunding as follows:
Title II: Allowed for General Solicitation of Accredited Investors for unlimited amounts per business (went live in September 2013)
Title III: Allowed for General Solicitation of Unaccredited Investors up to $1,000,000 per business per year (still not approved for final proposed rules).
Title IV: Allowed for General Solicitation of Unaccredited Investors up to $50,000,000 per business (went live in June 2015)
Of these three provisions, only Title II was operational when the final rules were adopted starting in September of 2013. Since then, hundreds of equity and debt based crowdfunding platforms have raised billions from accredited investors, the wealthiest Americans in the nation. It is estimated that there are approximately 8.7 million people who meet the wealth criteria of an accredited investors.
In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
- Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
- Have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
- Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
Although Title II equity & debt based crowdfunding has had a wonderful impact to the economy and to the creation of new businesses, the everyday investor has been left out of these potentially lucrative investors. Now however, with the passage of Title IV and its implementation on June 19th, that is all about to change. The everyday investor now has their chance to become a venture capitalist by having the ability to invest in early stage startups through the equity & debt based crowdfunding models.
The Regulation A+ framework is divided into two tiers:
- Tier 1 allows for the sale of up to $20M in securities within a 12-month window not subject to post-offering ongoing reporting or limits on the number of non-accredited investors involved in the offering.Tier 1 issuers will still need to comply with state “Blue Sky Laws” but a new “coordinated review” will be tested to streamline the state approval process and eliminate some compliance costs.
- Tier 2 allows issuers to sell up to $50M in securities within a 12-month period without worrying about state “Blue Sky Laws” but requires audited financial statements, post-offering ongoing reporting, and places a limit on the amount of non-accredited investors involved in each Tier 2 offering.The final rules can be found HERE. The great part of this law is the allowance of unaccredited investors to be able to invest in “mini initial public offerings (IPO’s)” that previously only the wealthiest of investors had access to. It has the potential to create new wealth opportunities for the everyday Americans who are smart with their money and realize that there is risk in these type of investments. Early stage companies are among the most risky investments available, so the real opportunity when reviewing these opportunities as a new investor is the ability to educate yourself on identifying promising startups and getting very good at financial literacy.
From the perspective of the startup companies that will be using this method of fundraising to market their offering, there is a very real need for the startup organization to market themselves. Unlike the Title II crowdfunding platforms that market the offerings on behalf of startups that qualify for funding on their websites, the regulation A+ platforms will likely rely heavily on startups to market themselves to their accredited and unaccredited audience. For most founders, marketing is the largest mystery in terms of how to make progress in their business, so they will need tools and resources to help them do this effectively.
That is where tools like Krowdster can make a big difference in getting additional exposure for startup organizations that are raising funding to the unaccredited investor audience. The application and platform has modules that allow for startup companies to identify individual across social media and within the journalist community who would be interested in potentially investing in the equity & debt based crowdfunding websites and/or writing a story about the startup company raising funds in this manner. Additionally, the application has leading press release syndication tool that allows startups to send out press releases that are picked up by over 100 leading publications for additional exposure.
The biggest difference between the Title II and Title IV fundraising, aside from the fact that unaccredited investors are now a part of the revolution, is the fact that Title IV allows the startups to determine if they have interest in their fundraising campaign BEFORE they pay the exorbitant amount of fees needed to register with the SEC and pay the legal and compliance costs of their security offering. They call this provision within Title IV “Testing the Waters” and this is exactly why you would want to use a tool like Krowdster to assist in gaining the exposure, traction, and interest in your offering.
But alas, the movement is just beginning on the unaccredited investor front. It has only been a viable option since June 19th, 2015, so there is a lot of innovations that are bound to come up that will assist entrepreneurs in their journey to raise capital for their businesses. Investors also will have innovations that will help them assess what makes a good offering and a good investment to ensure they are making the right decisions for their financial future. Equity & Debt crowdfunding will be a new method to bring prosperity, jobs, and returns on investment for years to come, but it will happen very slowly as the American public begins to realize the power they will have at their fingertips, literally, via this online fundraising revolution.