For the past 80 years only accredited investors, meaning individuals who make over $200,000 in income or who have $1 million in assets (excluding their primary residence), have been able to invest in startups in America. That has changed today with the implementation of Title IV of the JOBS Act which represents one of the biggest changes in the financial service industry. Additionally, this will likely have a positive impact on our economy as 65% of the net new jobs are created by small businesses, while 1 million jobs are cut each year by large corporations.
Regulation A+ is a newly revamped securities regulation that companies can rely on to raise up to $50 million from accredited and non-accredited investors alike. In traditional funding (Regulation D, Rule 506 (b) / (c) offerings) companies are either limited to having up to 35 non-accredited investors in their startup fundraising round or completely banned from onboarding non-accredited investors altogether. Accredited investors make up less than 1% of the US population, meaning 99% of people previously couldn’t invest in startups even if they understood the risk and had the liquid capital to deploy.
Regulation A has been around for years, but has not been widely used mainly because of the way the rules were written, making raising capital quite inefficient. In fact, the Securities and Exchange Commission (SEC) estimated only 26 offerings were conducted annually and they were capped at an upper funding limit of $5 million. Whereas now, with Regulation A+, companies can raise up to $20 million on Tier 1 and up to $50 million on Tier 2, which changes the game.
What does this mean for your startup?
If you do a Regulation A+ offering, everyone will be able to invest in the business from your hairdresser or dentist to the traditional angel investors and institutions. So this new fundraising outlet is truly complementary to how the typical fundraising process unfolds.
If you have a customer or user base that loves your brand, inviting them to invest allows them to have an ownership stake in your company so you get two for the price of one. It deepens the loyalty of your customers and give them a reason to be even bigger evangelists for the success of your business. Not to mention, you get to onboard investors who really believe in what you are creating as opposed to only wanting a return on their investment. It’s like investing with a cause.
Raising money under Regulation A+ can be complicated. Rightfully so, the SEC has many rules around how private securities are sold to the general public, in order to protect people from fraudulent offerings. As restrictions around who can invest are relaxed, the level of required documentation that is to be made available has also increased. Here are some of the more critical things you should know about what is required to raise under Regulation A+:
Location: Your company must be incorporated within the United States.
Cost: It could cost between $50,000 to $100,000 just to get everything ready for fundraising. Required documentation includes: offering documents, offering circular, GAAP/audited financials, due diligence performed, various filing with the SEC, and more depending on your specific situation.
Stage: Your company should be passed the point where it is raising seed funds to build your product/business. You should now be looking to raise or already be raising a Series A or later stage offering.
Financials: Your company must work with expert independent accountants to prepare audited financial statements (under Tier 2), organize your cap-table, and provide a clean auditor’s report.
In my opinion, it is appealing for companies to essentially do a public offering without having to pony up the capital and legal muscle to file the S-1 to do an IPO, which can run in the millions of dollars not to mention take several months. Although there is good information online explaining the requirements for raising under Tier I or Tier 2 offerings (see this helpful chart on TechCrunch), if you are considering raising capital using Regulation A+, it is critical to partner with a seasoned funding platform like 1000 Angels that has the know how to conduct the raise in a fully compliant manner. Selling securities to the public must be done with caution and in line with the securities regulations.