In the US, new amendments to the Securities Act 1933 have been introduced over the past two years as part of a package of new laws encouraging small-business funding, collectively known as the Jumpstart Our Business Startups (JOBS) Act. We’ll step you through what you need to know about the crowdfunding regulatory landscape in the Land of the Free.
The recent laws have meant that for the first time in 80 years, the public - not just the rich - can make investments in private companies. Businesses can pool funds from their friends and local communities rather than rely on the whim of banks and venture capitalists.
Regulation D
Regulation D has been around since the inception of the Securities Act, and allows for unlimited amounts to be raised from accredited, wealthy investors. We're talking those with a net worth of at least $1 million - not including their home – or those who’ve earned north of $200,000 per year ($300k with spouse) in each of the past 2 years. It also includes institutions such as banks and venture capitalists.
Two key new regulatory developments have facilitated the rise of the US crowdfunding industry:
Regulation A+
Reg A+ is like a mini-IPO and allows for raises between $20 million and $50 million on a tiered system. It became active in late 2015, and was designed for later-stage companies to raise funds publicly, without a full-blown IPO.
Advantages
You can raise up to $50 million a year from the general public, advertise your fundraising to solicit investors and “test the waters” to gauge market interest before filing with the SEC.
Disadvantages
It is an expensive option, with costs ranging from $50,000 to $100,000. Prior to raising funds, the US’ Securities and Exchange Commission (SEC) requires an offering placement memorandum – a stringent businesses plan - to be filed, costing up to $50,000 in legal fees.
Regulation Crowdfunding
Reg Crowdfunding - recently rolled out on 16th May 2016 - allows for smaller $1 million raises, and affords reduced disclosure requirements and costs.
Advantages
You can solicit investments as little as $100 from anyone - not just the wealthy. You can also advertise your campaign to raise funds from existing customers, and through social media and press channels. It provides a time and cost-effective means for friends, family and the general public to back your business.
Disadvantages
Curtail details are required by the SEC: two years of financials, and key details such as number of employees, shareholders who holds 20%+ voting rights, previous funding rounds, and how the funds will be used. There’s an annual $1 million limit for Reg Crowdfunding which can limit its use. To get around this, many platforms offer Reg Crowdfunding raises targeted at the general public, in combination with Reg D raises targeted at accredited investors.
Investors in a Regulation Crowdfunding offering have individual investor caps their investments to between 5% to 10% of their income or net worth each year. Furthermore, companies with more than 2000 shareholders or 500 unaccredited shareholders, and more than $25 million in assets, can be subject to burdensome SEC reporting requirements.
Lastly, there is a requirement to file annual financial statements to update investors. Failure to do so renders companies ineligible to fundraise with Regulation Crowdfunding again until the annual report is successfully filed.
That’s it on US crowdfunding laws. Next up, we’ll look at SAFEs (standing for Simple Agreement for Future Equity), the investment vehicles of choice in Reg Crowdfunding raises.