Crowdfunding just got a little bit more interesting. According to SEC Regulation A+, as of today companies can secure funding via crowdfunding provided they are compliant with a set of very specific laws and standards.
“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White in a release dated March 25, 2015. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
According to the SEC there are two tiers to the new regulation: Tier 1 “for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer” and Tier 2 “for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.” Both require similar requirements but Tier 2 investment requires further disclosure.
Slava Rubin, CEO of Indiegogo, has been watching the regulation for while and is excited about the possibilities.
“We’re encouraged by the SEC’s new equity crowdfunding regulations,” he said. “They enable startups and small businesses to secure additional funding, while providing strong investor protection. We will continue to explore how equity crowdfunding may play a role in our business model.”
How does the system work? After doing due diligence with a securities attorney this new regulation allows you to “test” the equity sale by running a Kickstarter-like campaign. This allows potential investors to express interest but not purchase the securities – in short you’re gathering a mailing list of potential small investors. Once you’ve collected the list you can begin to sell the equity to those investors using a licensed broker dealer.
Because you’re not actually selling during your campaign this is a sort of Kickstarter-lite – it allows you to get the word out and drum up interest while keeping on the right side of the law. A clever marketer, however, can see the intrinsic value of this play.
Similar regulations are in the works in the UK and Europe and it will fascinating to watch how companies begin using this equity crowdfunding to bypass the world of standard investment. You can read the entire SEC release below.