Did you notice? The doors to startup investing just blew wide open
Today the SEC grew your potential investor base by… a lot
Almost 1 year ago, I opened up my seed round to people who use my product. The ability for me to talk about my company — our progress, my vision for the product, the terms of the financing — were historic, as the pieces of the JOBS act that allowed me to publicly announce those details and that I was taking investment were only a few months old.
At the time, as to be expected with all new processes (especially those involving federal securities regulations), the steps required to complete the 25 transactions with the individual and institutional investors was arduous. One of the biggest barriers to actually getting a wire into the company’s account was the requirement that all investors be confirmed as ‘Accredited Investors’, and that I had taken substantial steps to prove their status. One of my investors was so frustrated by the process dictated by the SEC that they almost pulled out.
Unfortunately, there were other problems too — many of the people who love and use Quibb, people who wanted to join me as owners and investors in the company… they didn’t meet the definition of Accredited Investor.
Doh.
While I would have gladly had them join me, I was barred by the SEC from doing so. We all found this slightly insulting and obnoxious, considering some of the cheques were as low as $1k, coming from people earning $200k/year. These people were fully aware of the risks they were taking, and imho were more educated about their decision than most public market investors. Of the people who expressed interest in investing in Quibb, I had to politely say ‘Sorry, I can’t take your money!’ to ~50% of them.
Fast forward to today…
New rules associated with Title IV of the JOBS Act (commonly called ‘Regulation A+’) were released today, and have a massive potential to completely transform how small companies (including startups) raise capital. Companies looking to finance their companies have two new very viable options to consider — both of which are accessible to unaccredited and accredited investors.
Tier 1: Raise <$20M in 12mo period
Beyond filing a single unaudited statement, companies raising less than $20M can do so without disclosing financial statements, and are not required to undergo state securities law regulations in each of the states where a sale occurs.
Tier 2: ‘IPO-Lite’, raise up to $50M in 12mo period
At this level, the company will be subject to semi-annual updates, annual audits, reporting of material events, and otherwise be reviewed at the federal level. Hoever, they’re exempt from traditional state ‘blue-sky’ regulations (considered costly and time-consuming).
Either of these formats allow the company to sell common and preferred stock, debt, options, or warrants. Both tiers are incredibly permissive, as Regulation A previously only allowed companies to raise $5M/year, with many more requirements. After these updates to be published in the Federal Register, they become law 60 days later.
“These new rules provide an effective, workable path to raising capital that also provides strong investor protections. It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”
-SEC Chair Mary Jo White
The announcement mentions investor protections, ones that I believe are impactful yet would have allowed my company to access a broader range of keen investors. They include ‘bad actor’ background checks on the companies, disclosure of the company’s financial information, and (for Tier 2) limits investors to investing 10% of their annual income or net worth.
I wouldn’t be surprised to see startups that are running products with tightly knit communities, those with legions of fans, or a distributed and engaged workforce — and OK with the idea of sharing some financial information — turning to those people to raise their next round of funding, and potentially continuing on that path every year.
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oh, and fyi — i’m not a lawyer ;)
