Regulation A+: What Does it Take for Your Startup to Comply with New Crowdfunding Legislation?
by Clements & Shackle
Crowdfunding has cropped up more and more in recent years as a way for new businesses to hit the ground running. From a financial standpoint, startups may find that this low-cost and low-effort option for raising capital is a quick path to success. Crowdfunding may be as simple as filling out a form on a website. Many crowdfunding options don’t even require new businesses to give up equity in exchange for financial support. Unsurprisingly, the federal government and a number of individual states are hopping on the bandwagon in order to regulate this interesting new business funding option.
The new “Regulation A+” as mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Acts proposes to enable smaller companies to access investor capital through crowdfunding more easily, becomes effective June 19, 2015. However, this new regulation may need careful navigation in order to comply with all of the necessary requirements.
Under Regulation A+, eligible United States and Canada-based companies will be able to offer and sell up to $20 million (Tier 1) or $50 million (Tier 2) of equity in a single year, which is a large increase from the current $5 million limit. In addition to the basic disclosure requirements of companies conducting Tier 1 offerings, they will also have to pay for the cost of complying with the blue sky laws in each state they are holding offerings. This can cost tens of thousands of dollars and can require a significant time investment in order to manage fifty different state securities regulators. Fortunately, Regulation A+ means that companies will no longer have to provide audited financial statements. Perhaps this regulation will be most helpful for those in a specific geographic area including a small number of states to cut down on the financial and administrative burdens.
On the flip side, on top of the basic disclosure requirements, those conducting Tier 2 offerings will be subject to other requirements including providing two-years-worth of audited financial statements, filing annual, semiannual, and current event reports. Non-accredited investors will also be limited in the amount of securities they can purchase in a Tier 2 offering of no more than ten percent of the greater of the investor’s annual income or net worth. While the costs of audits can easily go for more than $25,000 a year, some CPA firms have been willing to conduct the audits for as little as $2,500 for startups.
The minimum amount spent at the outset has been estimated to be about $50,000 for those seeking to comply with the new regulation. While this may look like a substantial sum, it may prove to be a worthwhile investment for some companies. Regulation A+ will allow the companies to raise up to $50 million from the general public. Companies will also be able to approach potential investors and gauge interest before spending money on putting together all of their filings for the SEC.
Whether crowdfunding is worth it for your company depends upon a careful consideration of the above factors in light of the new legislation. If you’re interested in discussing crowdfunding or other means of fundraising for your business, please schedule an appointment with Clements & Shackle at 317-426-0581.