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New SEC Rules Open Equity Crowdfunding to Start-Ups
The SEC dropped a bombshell last week when it announced changes to its Regulation A, small public offerings rules (often called “Reg A+”). While that may sound like boring dense legalese, pay attention. The new rules essentially allow your company to raise up to $50 million (that’s right, million) through equity crowdfuning. Some are calling this the mini-IPO.
What is Equity Crowdfunding?
Equity crowdfunding is essentially where you allow anyone to invest in your company in small bits. They get a stake in your growth, and you get a pile of money. Until now, that trade-off had a number of significant legal hurdles. For example, you could only advertise to accredited (read: rich) investors, and you had to file with the SEC and any state you wanted to fundraise in. A nation-wide effort could mean 50 different securities filings. This SEC rule removes a number of those hurdles.
How This New Rule Works
So what does it do exactly? It modifies Reg A+ by raising the total amount you can raise from $5 million to $50 million. It then creates two tiers of fundraising. Tier I is limited to $20m, and Tier II can go up to $50m. Both can advertise and attract unaccredited inventors (read: not rich).The differences are in what is required of each tier. Tier II can raise up to $50m. However, there are increased reporting requirements and you have to get your past years’ financials audited. That can be pretty expensive. Investors are also limited in how much they can invest (based on their income or net worth). On the other hand, a Tier II campaign only files with the SEC, not all the other states. That’s a huge savings if you’re raising money across the country. Tier I only raises up to $20m (“only!”), and you don’t need your financials audited. An accountant’s review is enough. However, you will need to register with the states and the SEC. If you’re looking at raising nation-wide, this provision may make it significantly cheaper to do a Tier II instead. Tier I may be great for efforts focused on one state by companies with very little resources to start off with. Either way, these new rules change everything. VC’s and angels are no longer the only way to go – now you can get the people on your side. Talk to an attorney to see if equity crowdfunding under the new Reg A+ works for your goals. It could have big impacts on your bottom line, but also on how your company is organized. We’ll talk about that in future posts here on LaaW.