Easier, faster, and more accessible capital formation for private companies through online offerings
Access to capital is what allows small businesses to develop and grow. For capital to be effective, it has to be easily available. Enter equity crowdfunding.
Equity crowdfunding, or securities-based crowdfunding, is an alternative to soliciting investment through an initial public offering (IPO), fundraising through venture capital channels or pre-order platforms that support development of specific projects.
Think of equity crowdfunding as SEC-compliant tools for tech-driven securities offerings. It’s available to individual investors through online offerings and is an increasingly popular method of capital formation.
Why? Because equity crowdfunding allows companies to raise funds more efficiently and provides expanded access to capital. Public offerings can be arduous and costly, venture capital can be time intensive, exclusive, and place significant ownership in the hands of one shareholder, and crowdfunding platforms like the Kickstarters of the world are more in line with a pre-order service.
Giving businesses better capital formation options
In 2012 the Jumpstart Our Business Startups Act (JOBS Act) was passed by Congress and President Obama in support of entrepreneurship and small business. According to the SEC, the Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements.
The JOBS Act was intended to create more opportunities for small businesses, especially those with founders from communities with less access to traditional investors. Under this Act, there are two regulations that support crowdfunding: Reg A+ and Reg CF. These fall under the Securities and Exchange Commission’s (SEC) exempt offerings.
Securities-based crowdfunding is an exciting method of capital formation because it lowers the barrier to entry for both companies and investors. The process allows many investors to contribute to the growth and success of a company, offering new investment opportunities for individuals.
Through Reg A+ and CF, any investor over the age of 18, not just accredited investors, can invest in a private company. In other words, securities-based crowdfunding levels the playing field for companies and investors.
Ready to crowdfund: Reg CF or Reg A+?
There are two paths to equity crowdfunding. Companies typically determine which regulation they’ll choose based on how much capital they want to raise.
Regulation crowdfunding (CF) allows companies to raise up to $5 million per year through a funding portal. The process to launch the crowdfunding campaign can take as little as four weeks. Reg CF makes it possible for a company to publicly raise capital by selling securities like stock shares or debt online.
Regulation A+ allows companies to raise up to $75 million per year through a registered broker dealer. With more money comes more administration to prepare for the capital raise -- the process can take approximately six months. Similar to an IPO, Reg A+ requires that a company file its offering with the SEC, who will then qualify the offering. Reg A+ also lets investors sell their shares immediately, there is no lock-up period on the securities.
Last year, exciting changes to crowdfunding regulations were proposed under standard protocols, but have since been delayed. We recently explained what those changes would mean for companies and investors, and why there’s been a delay.
Prime Trust makes crowdfunding possible
Small business growth is a critical part of the economy and the fastest engine for economic development. Our crowdfunding platform solutions support this growth with an AML and KYC compliance program, payment solutions for various types of transactions, and escrow services for funds processing. Learn more about our crowdfunding solutions. *Updated March 19th, 2021