Reg A + Gives Women And Minority Founders Access To Startup Capital

Intel’s announcement of its $125 million fund to support women and minority-led startups last week was invigorating news to many who are vying for the few venture dollars that arrive in the pockets of women and minorities.

It’s good timing, and it comes on the heels of the U.S. Securities and Exchange Commission’s new regulations under RegA+ which just might be a new avenue for much needed capital for the same group of entrepreneurs.

Of the $48 billion invested by venture capitalists in 2014, only  7 percent went to women-led companies. That paucity is in spite of research by the Kauffman Foundation  showing that female-led companies have a better return on investment, achieving 12 percent higher revenue than male-owned tech companies. The investment numbers are even lower for Black and Hispanic founders of companies.

The reasons so few women and minorities get venture dollars has been the topic of great debate over the last year. Many point to the lack of women and minorities in tech, fewer available networks, and gender bias, as highlighted in the Ellen Pao case.

While the problem of gender and race bias in the venture capital community will take time to resolve, these new regulations providing for equity crowdfunding might just be a viable alternative in the short-term.

Reg A + is the newest offspring of the Jumpstart Our Business Startups Act, also known as the JOBS Act. It is meant to create greater access to capital for private businesses. Under the new regulations, private companies can raise up to $50 million from both accredited and non-accredited investors.

The ability for an entrepreneur to go directly to the public is potentially a game changer for women and minorities. That is true because women and minorities start businesses at twice the rate of other groups, but are often confined to the realm of “small businesses” due to the lack of access to capital to grow.

Prior regulations limited private investments in companies and startups to only accredited investors, or otherwise wealthy investors. In 2014, that definition applied to approximately 8 million people.

The new regulations not only remove this restriction, allowing non-accredited investors, or the average citizen to invest, but they provide an avenue for startups to go directly to the public to raise much needed seed capital.

These new rules are not perfect, but the SEC attempted to strike a balance between making the requirements less arduous while also protecting the average investor. Under the new rules, non-accredited investors will be limited to investing 10 percent of their income or net worth. There will also be two tiers of fundraising.

Tier 1 will allow companies to raise up to $20 million a year with limited regulation but will be required to register under state laws. Under Tier 2, a company may raise $50 million but will be subject to greater scrutiny and reporting.

So why is this potentially big news for women and minorities?

The rules allow entrepreneurs to raise money outside of Silicon Valley and democratizes investing by allowing a more diverse group of individuals the opportunity to potentially catch a rising financial star, a benefit that has been traditionally the domain of the wealthy accredited investors.

The ability for an entrepreneur to go directly to the public is potentially a game changer for women and minorities. That is true because  women and minorities start businesses at twice the rate  of other groups, but are often confined to the realm of “small businesses” due to the lack of access to capital to grow.

Like Kickstarter, Reg A+ operates as a type of equity crowdfunding. What that means is that  instead of getting a tote-bag or some other token for your $500 investment as you might on a crowdfunding site,  you will now receive actual equity, or ownership in the company. For those who followed the Oculus saga (the company bought by Facebook for $2 billion), they can understand why equity is better than a tote bag.

FundAthena, co-founded by African-American serial entrepreneur Kim Folsom, is the first online Reg A+ marketplace and was established to directly address the female funding disparity.

A recent report by Mass Solutions predicts that by 2016, the crowdfunding industry will account for $34.4 billion ininvestments. Reg A+ will only increase that amount.

To be sure, Reg A+ is not for every investor or every innovator. Not all companies will be successful just because they have access to public dollars. That is true in venture capital as well.

For one, the legal costs associated with the registration and audit  process could be well over $25K and be prohibitive to many startups.

Reg A+ does not directly solve the ongoing dilemma of access to venture capital dollars for women and minorities. But it does disrupt the investor status quo and provides a much needed alternative to capital for those who need it most.