Wednesday, June 10, 2015

the careful march forward of so-called crowdfunding rules

A while back I did a post that included a flow chart which was intended to give some guidance to entrepreneurs about the then new crowd funding rules. Recently the SEC approved additional regulation in its ongoing effort to implement the provisions of the Jobs Act. I've been asked by some entrepreneurs how this affects them. For early stage entrepreneurs it does not and it doesn't change the flow chart that I produced. Although nothing I write should be considered legal advice, I still think that flow chart is a useful tool. But here's an additional summary of the crowd funding rules.

Starting June 19, 2015, companies will have a new way to raise money from both accredited and unaccredited investors. These modifications to Regulation A, sometimes refered to as "IPO-Lite", allow a company to raise up to $50 million in growth capital. For early stage entrepreneurs, the operative word there is "growth". This is not something that companies raising a seed or A round should worry about. You aren't doing either an IPO or even a "lite" IPO. It might be something to consider at some point in the future but not at the early stage. Although the regulatory burden has been reduced, it's still not for a startup. If you want more information on this, Michael Raneri has been publishing some helpful articles in Forbes and other places.

The above is referred to as "Title IV" of the Jobs act, modifying Reg A. My flow chart refers to "Title II" which relates to the modification of Reg D. Those modifications went into effect in September 2013. The SEC took the old Reg D, the rules under which most entrepreneurs raise equity, and split it into two paths for entrepreneurs to raise private capital.

One path is 506b of Reg D. Under this rule entrepreneurs can not talk in public about raising capital. In other words, you have to be certain that you only talk with accredited investors not the general public. This is the old Reg D. Even though in the past people tended to talk publicly about their fundraising--in business plan competitions, for example--it really wasn't allowed. The modifications to Reg D clarified the regulations and essentially says that if you want to talk publicly--again, defined as an audience that may include unaccredited investors--you have to follow a new variant of the 506 rules, 506c.

The new Rule 506c of Reg D does allow you to talk publicly about raising capital ("general solicitation") but as with 506b, you can still only take in money from accredited investors. Why would you not always use 506c? The reason is that the reporting burden is significantly greater for the entrepreneur and places the onus on them, not the investor, to verify that investors are accredited. It is this rule that has opened up opportunities for general solicitation--crowd funding--from through platforms like AngelList. There's a good explanation of all this on the AngelList site.

What we haven't got to yet is regulation from the SEC allowing you, as an early stage entrepreneur, without the expense and time of Reg A, to take in money from unaccredited investors. This "real" crowdfunding is still not available.


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