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Reg A+ is here!!! But is it crowdfunding?

There has been a potentially game-changing development in the world of crowdfunding. The SEC, while unable for a host of reasons to approve rules governing Title III of the JOBS Act (which permits true crowdfunding), did approve the final rules for Title IV. When the SEC trotted out the proposed rules, all the interest groups – including state securities administrators – came out in full force. I am happy to report that the crowdfunding community won the day, in no small part to relentlessly educating the SEC staff that championed this change.

There is a seldom used exemption that allows for sales of securities called “Regulation A”. In recent years, less than 20 offerings a year were being conducted using this Regulation A. To try to jumpstart use of that exemption, Congress wrote legislation to legalize an enhanced Regulation A.

In the new rules, the SEC divides the new Regulation A into two tiers. Tier One is a basic rehash of the old unused exemption, which gives power to each individual state to approve or disapprove of an offering.

Tier Two is colloquially referred to as “Reg A+”. And it really provides a great opportunity for companies to begin raising money online. Reg A+ eliminates the various state securities agencies from reviewing the offering at all.

The highlights:

• A company can raise up to $50 million.
• The SEC has to approve the offering.
• The company, while raising money, has semi-annual reporting requirements.
• The company is required to have audited financial statements.
• Under certain circumstances, the company may exceed the 2,000 shareholder limitation without triggering public company reporting requirements.

• AND MOST IMPORTANTLY: these offerings are NOT limited to only accredited (rich) investors. Any non-accredited investor (basically 93% of the public) can invest, provided that they are not investing in excess of 10% of the greater of their net worth or annual income.

The last part is the game-changer. Already being referred to as the “Mini-IPO”, companies will now be able to connect with all their customers and have those customers become something special – owners.

Of course, the cost of compliance for a Reg A+ offering eliminates little start-ups and mom-and-pops. But for companies that were previously unable to raise money online (because of earlier limitations on general solicitation and the current prohibition on raising money for a private company from non-accredited investors online), this is going to open up major doors. Yes – the audit requirements and the fact that a lawyer will need to be involved makes the transaction cost prohibitive for a restaurant that wants to build a back patio, but for the restaurant that wants to expand by opening up five new locations? Reg A+ is perfect!

The dirty secret is that the SEC was also trying to eliminate the use of reverse-merger transactions to get a company public. In the recent past, the easiest way for a company to become publicly traded was to merge into a defunct public shell, avoiding the usual barriers to going public. The result is that a publicly traded Jiffy Lube chain that went out of business in North Carolina was all of a sudden a mining operation in Southern Arizona without much regulatory oversight. By bringing down compliance costs from a real IPO, the Reg A+ offering will give a company a path to becoming publicly traded without the need to resort to that common shenanigan.

These rules will become effective at the beginning of June. It will be interested to see if the SEC takes its responsibility to efficiently turn around these potential offerings seriously. If so, you can expect that this Fall will be full of excitement in the world of online investing. Smart consumer facing companies will take this opportunity to transform their customers into owners.

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Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Regulation A+ passes unanimously

Great news! The SEC commissioners have unanimously passed final rules for Regulation A+.

While we are reading the final rules, below is a great chart from CrowdCheck that explains the differences between Reg D and the new Reg A. In short, this is going to potentially be a game changer in the crowdfunding world. Although this won’t work for small offerings of a few hundred thousand dollars, it will change the face of financing for the companies that are looking to raise a few million.

Click to access Comparison%20of%20506,%20CF,%20Reg%20A.pdf

A Little Note About Intrastate Crowdfunding …

arizona-sealLiving out here in Arizona, we are well known for interesting politics. In the aftermath of Super Bowl 49 we woke up to the introduction of an intrastate crowdfunding bill in the state house and senate. Based on the support of the business community, it is likely that the bill will pass, and Arizona will join the more than 25% of the individual states that already have intrastate crowdfunding.

I found a couple of things particularly interesting about the proposed bill:

More is less. The proposed crowdfunding bill prevents having the problems of The JOBS Act and contains very particular provisions regarding implementation of the new law. Instead of relying on the state securities officials to make any rules, the bill itself contains page after page of specific direction.

The problem is that both opponents of the bill and proponents alike will be able to find some issue with the proposed language. Does that mean that it dies on the vine because the language isn’t quite right (see SEC)?

Also, because the bill is so particular, any changes would require a legislative change. This greatly reduces flexibility in the implementation of the law. If something isn’t right, you’re counting on a legislative fix. And we all know how dysfunctional legislative bodies can be.

It just doesn’t matter. There have been a lot of states that have implemented intrastate crowdfunding laws. And there have been almost no deals completed under those laws. There are a couple reasons for the lack of activity.

First, there is a hard time educating businesses about a fundraising concept that varies from state to state. It is likewise hard to build much media momentum when the story is so hard to tell because of the variety of laws that are on the books.

Second, securities lawyers are terrified of the SEC guidance so far. There is a worry that any use of the Internet (which is available in every state) to raise money in one specific state is going to risk action by the SEC. The fear of triggering the SEC always seems to shut down lawyers …

In short, it is great news that the Arizona legislature has taken up the intrastate fight. But is intrastate crowdfunding the answer for small businesses? Nope.
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Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

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