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.

http://www.crowdcheck.com/sites/default/files/Comparison%20of%20506,%20CF,%20Reg%20A.pdf

Startups, the SEC and what it means for crowdfunding

The following article was originally published by AZ Tech Beat.
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For most startup entrepreneurs, they go into the game knowing they will eventually need to raise money. They also know that more often than not, investors, in the form of family, friends or angel investors, will invest in exchange for shares of the company. Regardless of who actually belies up to the bar with capital, the entrepreneur needs to remember that selling of shares is tightly regulated by the Securities and Exchange Commission (SEC).

photodune-crowd-funding-yellow-roadsigncrop-500x325Back in the era of the Great Depression, the SEC was created to regulate the sale and purchase of securities. These laws were designed to protect unsuspecting people from losing all their money to cheats and swindles. The result is that the SEC created a regulatory scheme that made it very expensive and difficult to raise money, even from smart and rich people who knew what they were doing.

This all changed in 2012 when The JOBS Act became law. There are two major provisions that impact the way the companies are going to be raising money from private investors.

The first has to do with the legalization of general solicitation. In order to protect investors from stock promoters stealing money, the SEC prohibited people from raising money through advertisements. The problem is that for most companies, it really isn’t that they want to advertise in the newspaper or on TV that they are raising money. Instead the general solicitation ban prevented companies from communicating the fact that they were raising money at all. In short, the pre-JOBS Act law basically prohibited the company from telling anyone it was raising money except those that had a pre-existing business relationship. This shrunk the market a great deal. This “old” rule is contained in Rule 506(b).

The old Rule 506(b) also meant that most people raising money were unknowingly breaking the law. Things like pitch-days (where companies present their business plan to a room full of angel investors), sending along a private placement memorandum to a friend of a friend … all those actions were actually prohibited. The problem of course is that no one even knew it.

So Congress knew that this outdated and constantly ignored ban needed to be revised. Remember that the SEC only allows high net worth people to invest in most private deals. Only people with more than $200,000 in annual income or net worth (excluding their house) of more than $1,000,000 can participate. These people are called accredited investors. What this means is that most people are completely shut out from investing. However, when someone indicated an interest in investing, they simply could tell the company that they qualified as an accredited investor – they never had to prove it.

As part of the change, Congress set up a new deal where a company can generally solicit – meaning a company can advertise that they are taking investors. But in exchange for the new ability to advertise, if someone says they are accredited investor, the investor has to prove it. Of course, this has created another set of issues and problems, all of which are being worked through (including how exactly investors are verified and how advertising material gets into a company’s “permanent file” with the SEC). This new paradigm – where a company can advertise their stock offering but in exchange must verify the accredited status of the new investor – is all contained in new Rule 506(c).

In short, the change has been very significant. For startup entrepreneurs who now have the ability to communicate freely about money, the sky is the limit. Websites, television ads and social media campaigns are about to become totally commonplace to raise money.

But the next step is still coming in 2014. Then, anyone, rich or not, will be able to make investments into companies using the “crowdfunding” provision of The JOBS Act. The SEC just put out proposed rules which allow for input from the investing community about how exactly equity crowdfunding is going to work.

There are very few laws that are as complicated as securities laws. However, the good news is that things are finally changing – catching up to the real world of social media and instant communication, and a fulfilling future awaits more startups and wise investors.

Jonathan Frutkin

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.

Cricca Concierge

In the world of publicly traded stock, there are companies that are known as “transfer agents”. Their purpose is to facilitate transfer of stock ownership from one shareholder to another. It is really record-keeping process, and every non-bank transfer agent must be registered with the SEC. These registration criccarequirements are meant to keep out fly-by-night operations which may disappear with important records of who owns a company.

Investor relations firms also occupy the post-investment space. Rather than acting merely as a conduit for the transfer of securities, investor relations firm focus on communicating with investors. The communication can be something as simple as sending a proxy forms, or something as complex is putting together annual reports are other items for investors.

Crowdfunding is different. With respect to our clients, we’re talking about consumer-facing businesses, which have thousands of customers. These are the companies that successfully raise money using crowdfunding. As a result of those efforts, they all of a sudden have hundreds of shareholders. The fact is that these relatively small companies now have an extra operational hurdle. Plus they still need to activate these new owners as part of their marketing strategy. Even more than during the funding campaign itself, the period post-crowdfunding creates both traps and opportunity. These crowdfunded companies can’t be relegated to choose between a company that merely acts as a transfer agent or produces annual reports.

That is why we introduced Cricca Concierge. We enhance the power of your crowd – the owners of your business – and turn them into something much more than just owners. We turn them into high-frequency, high spending, and evangelical customers. These are the type of people that you want to communicate with often, ensure that they are receiving answers to all the questions, and are encouraged to use their social networks to promote the business. These are also the same people that you want to plan special events around and provide perks that are a natural part of the business. Cricca Concierge provides exactly that service.

We also help navigate secondary markets, transfers of shares, and other things that a traditional transfer agent would do. We also work with you to produce annual reports for your new owners. We do this all through one of the funding portal partners or through a branded website that is only accessible to your owners. We also have live support, both online chat, email and live person via Skype or telephone. Depending on the type of business you have, this type of concierge service is necessary for you to get the true “bang for your buck” that crowdfunding promises.

Our services are primarily directed toward the companies after we’ve helped them raise money, but we also accept a select number of companies that have been crowdfunded without our help. Do not hesitate to contact us regarding your specific needs. Our services are both powerful and flexible.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

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