Preface: Crowdfunding is developing into the future of business financing with the internet lowering the barriers between investors and entrepreneurs. Title IV is just one aspect of the JOBS Act that legislated crowdfunding into law.
Crowdfunding – What is Title IV with Regulation A+
The JOBS Act President Obama signed into legislation in 2012, is implementing incrementally. An acronym for Jumpstart Our Business Startups Act, The JOBS Act has multiple titles. The Act is designed to encourage funding for businesses in the USA, with easing of regulations on issuance of securities for funding business ventures. The JOBS Act simplifies the laws and regulations for companies to go public. Mid-summer 2015 Title IV of the JOBS Act was finalized in legislation. Title IV includes Regulation A+.
Title IV of the JOBS Act permits non-accredited investors into crowdfunding larger capital raising projects. Title IV has two tiers. Tier 1 permits a company to raise as much as $20m, with required registration submitted each state the business seeks to raise money in. Tier II permits a company to raise $20m to $50m while circumventing the individual state registrations and regulation – a preemption of Blue Sky laws. Tier I and Tier II of Title IV are both considered Regulation A+.
Title IV is a viable alternative to an IPO for many small business, who seek to acquire investor capital. Regulation A+ is great for business who want to raise capital from non-accredited investors, and have the revenue to support the business venture in a crowdfunding venture. Title IV is not for the smaller business. The cost to conduct a Regulation A+ offering is $70,000+/- and the annual reporting costs can be $15,000 to $20,000 or higher. Regulation A+ requires highly detailed disclosures, similar to an IPO. If your idea is confidential, crowdfunding probably isn’t how you want to fund it. But formulas and patents remain protected with intellectual property laws.
Why avoid Regulation A+? If you’re an entrepreneur who thinks raising money is easy, reconsider. Regulation A+ offerings put your business in the limelight; and acquisition fees, management fees, brokerage fees, etc., could be reduced or disallowed once the SEC comments on your proposal.
Why is Regulation A+ spectacular and published to spur economic expansion and new jobs? First, almost anyone can raise money with Regulation A+. Secondly, Regulation A+ permits you to sell almost any security – equity, debt, convertible debt, corporate stock, LLC interests or limited partner interests.. Limits? You couldn’t invest in asset backed securities such as credit card debt, or used car loans. With the right plan you could sell your business to local investors who support your community and want to invest locally; or with Regulation A+ you could start a local REIT.
Tier 1 financing doesn’t require audited financials or ongoing reporting, only reviewed financial statements from a CPA. Tier II does require two years of audited financials, an annual 1-K, and semiannual Form A-SA and current event reports using Form 1-U. As mentioned previously, In Tier II, if an issuer wants to raise money from investors in multiple states, they can obtain exemption from Blue Sky laws. This has real savings for raising capital, when each state registration could cost tens of thousands per state. Let’s say you invest in Regulation A+ securities, you can sell them the very next day. No Rule 144 on mandatory holdings periods.
Expressions of Interest – business can’t raise capital until the SEC has reviewed and approved the offering, but you can check on wind gusts with an expression of investor interest, to check if investors will write checks to your venture.
As Title II and Title III also become viable alternative for business financing; crowdfund is positioning to be the wave of the of business financing future. With internet based venture equity exchanges, the capital markets for small businesses are certain to be reinvented in the future years.