In 60 days, a new version of crowdfunding for unaccredited investors will go live in the United States. This adds another path for startups and small businesses looking to raise money from willing investors. It is called Regulation A+ and is a brave move by the Securities and Exchange Commission (SEC), to fix the problems that have plagued Regulation A (too small, too costly, too bureaucratic) and open the door to bringing the private capital markets online in a more transparent and efficient manner. But what does this mean to you? If you are an entrepreneur seeking capital, which path is right for your business? What are the limits, and which is the most affordable and least bureaucratic option?
As many of you know, my investment partners and I were champions of the JOBS Act. We are also successful entrepreneurs turned venture capitalists, so we understand what it takes to turn an idea into a sustainable business and the tradeoffs between time, capital, and bureaucracy. So we advise that, when raising money, you understand which fundraising option is right for you. To do so, you need to ask questions like: How much money do I need? Who are my investors and are they accredited? How much work is it going to take? With all the current (and forthcoming) changes, it is important for you to understand these differences.
We’ve tried to break down some current options by providing the following abbreviated chart. (Disclaimer: Securities laws are much more complex than this preview and when raising funds one should always consult with a securities attorney).
If you take a good look at the chart, you can see that those small startups (with little to audit) that want to crowdfund a small amount of debt or equity from their friends or family with less cost, compliance, and oversight will have to wait until Title III of the JOBS Act is implemented. If you wish to get started today, your options are greater than they were a few years ago, but some come with added cost/compliance.
What does this mean for investors?
While this is all good news for businesses seeking capital, this is also good news for investors seeking to diversify their portfolios. We’ve been in Auckland, New Zealand, this week at a meeting of High Net Worth Investors and had the opportunity to hear from some amazing economists and capital market experts. We’ve left these meeting keenly focused on the fact that investing in startups and small businesses is a great way to diversify your portfolio, seek alpha from individuals that you are most likely connected to via your social network, and leverage technology to facilitate the process. With more fundraising options like those above, we believe we’ll see greater investment opportunities for investors.
One final word
And one final thing: We would like to praise the hard work by the Crowdfund Intermediary Regulatory Advocates (CFIRA) and DJ Paul in particular, who was appointed by SEC Chair Mary Jo White to the SEC’s advisory committee on small and emerging companies. Paul has been able to share a very frank view with both crowdfunding industry advocates and the hardworking individuals within the SEC about both the realities of the law and realities of business. He and the team around him have been working tirelessly to advance the needs of entrepreneurs and investors. So thank you for your hard work!
Sherwood Neiss is a partner at Crowdfund Capital Advisors. Neiss helped lead the U.S. fight to legalize debt and equity based crowdfunding, coauthored Crowdfund Investing for Dummies, and cofounded Crowdfund Capital Advisors, where he provides strategy and technology services to those seeking to benefit from crowdfund investing. Sherwood Neiss and Jason Best are credited as the fathers of Title III of the JOBS Act. After attending the bill signing ceremony at the White House, they formed Crowdfund Capital Advisors to study what is happening in crowdfunding, analyze results, report trends, and follow opportunities. They are active investors in the crowd finance space.