To register or not to register – such has been the overriding question for US startups looking to raise money ever since the passage of the Securities Act in 1933.
The registered route has meant a public offering presided over by the Securities and Exchange Commission (SEC), a process that entails significant expenditures of time and money in order to meet SEC disclosure standards. The sole alternative for smaller businesses lacking the necessary resources for a public offering – at least for the past four decades – was to pursue an unregistered offering (also known as a private placement) under the Securities Act’s Regulation D, which regulates the sale of unregistered securities to private investors.
The primary beneficiaries of Regulation D have generally been wealthy investors who, so long as they meet the minimum capital thresholds of an accredited investor under Rule 506(b), are able to invest an unlimited amount into the unregistered securities on offer. Those who fall short of the threshold – non-accredited investors – are limited in how they can purchase the unregistered offering.
These limited options were sufficient in the world of telephone books, floppy disks, and Blockbuster Video. But not so much in the world of today, where tech startups can render entire industries obsolete in just a few short years – and make early adopters a pile of money in the process.
The frenetic pace of change has necessitated new ways of raising venture capital, and new technologies have helped democratize the process, ensuring that anyone can get in at the ground floor.
President Obama’s JOBS Act threw the regulatory doors wide open with regards to how startups can raise unregistered venture capital. The Act introduced two new tools: Regulation A+, which establishes a ‘mini-IPO’ process for companies seeking to raise up to $50 million from the public, and Regulation Crowdfunding (also known as Regulation CF), which allows companies to raise up to $1,070,000 via online crowdfunding portals (the SEC is planning to raise this cap to $5 million).
In the United States, online funding portals must be registered with the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that operates under the supervision of the SEC. Currently, there are around 53 FINRA-approved funding portals selling various unregistered securities to the public under Regulation A+, Regulation D, and Regulation CF, depending on the portal and the offering in question.
In Canada, the registration requirements of online funding portals vary by province, with some provinces offering a registration exemption so long as the portal is not registered as a dealer (dealers are required to give advice on suitable investment products). But in terms crowdfunding, Canadian startups have largely ignored the option of raising money through the integrated crowdfunding exception, which was introduced in 2016. Instead they tend to favor the Offering Memorandum Exception which, similar to Regulation A+, is viewed as a ‘mini-IPO’ and sets out strict limits on who can invest and how much. Incidentally, the Canadian Securities Administrators (CSA) has recently proposed new steps to harmonize the crowdfunding regulatory framework among Canada’s provinces.
The combined impact of Regulation A+ and Regulation Crowdfunding, along with similar regulatory steps in Canada, has been to democratize venture capital, taking the early adopter conversation out of the backrooms of elite society and shifting it to online funding portals, where anyone can participate so long as they have the requisite money and, more importantly, the knowledge. Because like with any investment, exempt market investors should conduct their own research on an offering before making any purchase.
Some $2.7 trillion worth of new capital was raised in the US exempt market in 2019, dwarfing the $1.2 trillion in registered offerings over the same period. This massive and rapidly evolving market represents an opportunity not just for retail investors, but startups in need of seed money as well. This is where Libertas Capital Partners can help. Schedule a call today to find out how your startup can thrive in this new era of democratized capital.
The information in this article is for educational purposes only and does not constitute legal, financial or investment advice.