The SEC's new Title III Equity CrowdFunding rules go into effect May 16th. These new rules expand Equity CrowdFunding to allow main street investors to invest in private startup companies as a key part of the JOBS Act. In June 2015, the SEC also enabled groundbreaking new rules called Regulation A+ (or RegA+ for short).
The capital raising landscape is making its biggest shift in decades. I now see a fundraising continuum using online platforms that extends from startups raising seed capital of as little as $100k through established companies raising to $75 million per year per company.
U.S. entrepreneurs have never had it so good. Let's explore the new ecosystem and see what path suits your company best. (I am deliberately condensing this guidance for the sake of clarity. There are many great sources for comprehensive detail on this topic).
“Wide” Equity CrowdFunding, also known as Title III: Startups raising $100k to $1 mill in seed capital fit newly expanded Mainstreet equity crowdfunding nicely. This means that Mainstreet investors (both accredited and non-accredited individuals) worldwide can now buy shares in your company. The smaller the capital raise, the less demanding the disclosure rules, with breakpoints at $100k and $500k. Expect many of the existing equity crowdfunding platforms to now expand to include main street investors.
Vetted financials are required in many cases, and there will be marketing costs to promote your offering to investors. These costs could range from as low as $10k to the $60k range. The marketing cost will vary greatly depending on who is doing the marketing and executed well. It costs money to get the attention of investors. Marketing agencies cannot charge a percentage fee on capital raised. They have to charge for their services in cash. But the good news is that the cost of reaching main street investors is far lower than the cost of drawing in Accredited investors - if your company appeals to consumers - which is critically important here.
The rumor mill indicates SeedInvest and Indiegogo will be entering the Title III fray as funding platforms; the initial list will be announced on Monday, May 16th. Many more platforms will likely soon be approved by FINRA, and this will likely be a busy field by the end of 2016. The most attractive Title III platforms will be large-scale and utilize their scale efficiently for Title III startups. Indiegogo is my favorite in the first year of Title III because they already have a critical mass of investors they could leverage to benefit Title III companies.
Accredited Equity CrowdFunding: Startups raising $1mill to $4mill and up fit the existing style of equity crowdfunding platforms, raising capital from accredited (wealthy) investors. Think Fundable, CrowdFunder, Angellist, EquityNet as examples of this.
Reg A+:Successful mid-stage companies, corporate spinouts (think management buyout), companies considering a reverse merger with a public shell, and select, low-risk startups fit Reg A+ platforms. You can raise to 75 mills per year using Reg A+. You could make your own offering, or you can use one of the funding platforms that exist today (examples include DigitalOffering, SeedInvest, StartEngine, and ManhattanStreetCapital). Shares can be liquid immediately after the offering. It is possible to take your company public using Reg A+.
In all forms of online fundraising/CrowdFunding:
- You will need to make a compelling pitch for your business and the use of the capital, the market, and why your company will survive competition in the long haul.
- Be prepared for open disclosure. You have to be open and avoid hype to have a good chance of getting investor engagement and investment and to meet the SEC and FINRA requirements. Expect thousands of investors to be examining your every claim, your LinkedIn profile, and your career to date.
- Now is the time, and the opportunity has never been greater. We can expect tremendous evolution in the funding landscape due to the new expansion of online capital raising options for U.S. entrepreneurs.
Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies, including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure, and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves, and eASIC.
www.ManhattanStreetCapital.com
Manhattan Street Capital, 5694 Mission Center Rd, Suite 602-468, San Diego, CA 92108.