Small and medium-sized businesses can leverage an overlooked exemption to fuel their growth and capital plans: Regulation Crowdfunding.
When the Jumpstart Our Business Startups (JOBS) Act was signed into law in 2016, some small and medium-sized businesses (SMBs) focused on one of four crowdfunding exemptions to raise capital: Regulation A+. Regulation A+ allows companies to raise up to $50 million from accredited and non-accredited investors in exchange for equity. Accredited investors are individuals who earn an annual income of $200,000 or have a net worth over $1 million, and can invest any amount. Non-accredited investors are individuals who do not meet these requirements, and can invest no more than 10% of their annual income or net worth — whichever is less.
Some SMBs viewed Regulation A+ as the exemption that could give them the same level of notoriety as a public company raising capital. This is because they believed it would allow them to market their offering on a national scale, attract a large pool of accredited and non-accredited investors, quickly raise millions of dollars, and avoid costly ongoing reporting obligations.
According to PwC, a global consulting firm, the entire process of becoming a public company can take one to two years and cost over $1 million.
The reality is that initiating a Regulation A+ offering can also take time and cost a lot. Companies are required to prepare a business plan, pitch deck, two-years of audited financials, and complete a Form 1-A. A Form 1-A is a legal document that contains detailed information about a company’s offering, financials, properties, directors, executive officers and employees, security holders, risk factors, and more. This can take lawyers months to finalize. When the required materials are complete, they must be filed with the US Securities Exchange Commission (SEC) and are subject to a rigorous review and comment process — prior to being approved. The entire process can take up to five months and cost more than $125,000 to hire the required lawyers, auditors, and other professional services.
For SMBs who prefer not to wait that long or don’t have the capital available to conduct a Regulation A+, they should consider a Regulation Crowdfunding offering. Regulation Crowdfunding allows companies to raise up to $1.07 million from accredited and non-accredited investors in exchange for equity. Accredited investors can invest a maximum of $107,000 and non-accredited investors can invest a maximum of 5% of their annual income or net worth — whichever is less. Companies are required to prepare a business plan, pitch deck, reviewed financials, and a Form C. A Form C is a legal document that contains information about a company’s offering, financials, management, and risk factors. When the required materials are complete, they must be filed with the SEC. Unlike a Regulation A+ offering, they do not have to be approved which means an offering can start as soon as it’s filed. The entire process can take weeks, not months, and cost between $5,000-$10,000 to hire the required lawyers, accountants, and other professional services.
For SMBs, Regulation Crowdfunding is the most efficient way to measure consumer and investor interest in the business, since it’s the least time and cost prohibitive exemption. If and when successful, they’ll have a better sense on whether or not it’s worth executing a Regulation A+ offering and can use the proceeds to fund the process — which can raise substantially more capital.
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