How To Raise Money The New Way

Last week marked the beginning of what should be a dramatic change in the way startups and small businesses raise money. Title IV of the JOBS Act of 2012 contains the rules for investing known as Regulation A. On June 19th the updates to those rules (now being called Regulation A+) took effect.

These updates allow for two major changes; smaller companies have easier access to investor capital through equity crowdfunding and more people are able to invest with more options for investing. These new rules will essentially enable small businesses to have what’s being dubbed a “mini IPO” from the general public. With Regulation A+, startups don’t have to wait to generate the funds for a costly and time-consuming traditional IPO. Here are the main rules that have set this into action, and also the key points for startups and small businesses to bear in mind.

What has changed?

1. Companies can now raise up to $50 million (previously $5 million) in a public offering.

2. No longer a need for companies to pay for expensive state-by-state compliance (previously they needed to register their offering in each state where it is sold).

3. Non-accredited investors can now invest, meaning the general public is open to invest.

4. The securities are unrestricted meaning that they can be resold.

What does this mean for startups and small businesses?

1. Clean house. The SEC requires all officers, directors and major shareholders of your company to undergo a “bad actor” background investigation. Read up on what constitutes a “bad actor” in the SEC’s eyes and make sure no one associated with your company falls into one of their categories.

2. Be prepared to act like a public company. Before going public make sure you’ve proved your business model. If you’re ready to show the public your finances, have them in order and have any trademarks or patents secured.

3. Get outside help. You will need outside assistance (a lawyer and/or a CPA) to stay in compliance with the rules and regulations, accounting, and legal issues that come along with Regulation A+.

4. Choose wisely. Regulation A+ has two tiers for businesses to select from for raising capital. See below for more information on both Tier 1 and Tier 2.

Tier 1
Pros:

  • Companies can raise up to $20 million
  • No requirement of audited financial statements
  • No limit on amounts to be raised from non-accredited investors
  • No ongoing reporting to the SEC

Cons:

  • Must comply with the costly “blue sky” laws of every state where you want to raise money

Tier 2
Pros:

  • Companies can raise up to $50 million
  • No state “blue sky” law compliance

Cons:

  • Required to audit two years of financial statements
  • Limits the amount a non-accredited investor can invest in each offering (annual limit of up to 10 percent of their income or net worth, depending on which amount is greater)
  • Ongoing reporting requirements to the SEC after funds are raised

Most companies will select Tier 2 because it is easier for raising money nationally since you do not need to comply with each of the 50 state securities regulators. If your company is raising money in a specific region and only need to comply with a couple of state securities regulators then Tier 1 will be the better choice.

For more information on the JOBS Act and its regulations, visit sec.gov.