Crowdfunding, contrary to popular belief, isn't just as easy as putting together a Kickstarter campaign for your business, while we can often wish it were. It's this misconception that can often be pretty well understood from a company’s perspective, but also in the minds of regulatory bodies in countries like the United States.
Even though equity crowdfunding has effectively become a known avenue for securing capital for a company that wouldn't otherwise be successful at obtaining it from venture capitalists or angel investors.
For regulators, it is still a method that is undergoing 'growing pains,' and this can sometimes leave entrepreneurs a little in the dark about what kind of regulation their crowdfunding comes under.
Enter the Jobs Act of 2012, which provided a more conclusive structure for businesses to raise funds through crowdfunding. So what is important about this act precisely? Well, title III and IV - otherwise known as Regulations CF and A+. So here are the differences between the two.
Where CF differs is that it offers companies with a range of exceptions to requirements on their part to get registered. Startup companies looking to benefit from exemptions by being classified as a CF Registered one, it has to adhere to the following requirements:
Conventionally, Regulation CF is targeted towards smaller-scale companies looking to earn a smaller cash injection at the early stages.
Another aspect which the Jobs Act broached was which type of investors can partake in a REG CF offering. We will go into this in more depth later on in the article.
So what if you're a business seeking to raise more than this amount? Enter Regulation A+
With Regulation A+, it bears more of the resemblance to guidelines set up for an Initial Public Offering. Under Regulation A+, businesses can raise up to $50 million from a range of established investment, and the general public through equity crowdfunding.
With this kind of upper investment ceiling, Regulation A+ targets far larger businesses looking to secure a substantial amount of capital, so long as they adhere to and understand the following guidelines.
Before the Jobs Act came into play in 2015 with Title 4, equity offerings or capital raises were limited to VC’s, Funds, Institutions, and Accredited Investors. The critical component post jobs act was opening up the offerings to non-accredited investors or as they are otherwise known, retail investors. In saying that;
What is an Accredited Investor?
Accreditation parameters differ from jurisdiction to jurisdiction, but as we are focused on REG A+ and Reg CF offerings in this article, we will look at the definition of an Accredited Investor in the United States of America.
As an individual, the parameters are as follows:
· If it is asset-based, the individual net worth of 1 million United States Dollars
· If it is income based, a minimum income if 200,000 United States Dollars per year for the previous two years.
· As a married couple, the couple income combined must maintain a floor of 300,000 United States Dollars, and all must expect the same amount of income for the upcoming year.
What is a Retail Investor?
A retail or non-accredited investor in any person or entity which does not meet the criteria of the accreditation parameters which are set out by their local governing body. Being classified as a retail investor restricts the investor from participation either in full or with limitations on specific investments or even asset classes.
The ability to assess your own net worth is quite important when determining if you are an accredited investor or if you are a retail or non-accredited investor. In the simple version it is the accumulation of all of your assets minus your debts and your primary residence.
A we can see by from the table above the primary differences lie in the amount of money a company is able to raise via each type of offering. While Regulation A+ is broken down into two tiers with differing amounts which can be raised this does not mean if you have raised 20 million you must stop there. You can continue into tier 2 while you are finalizing the documentation with the SEC.
The amount a company can raise via regulation CF is certainly dwarfed by regualtion A+ but this just allows for a more defined fund raise. A company may only need to raise a small amount of capital in order to accomplish a certain target such a a proof of concept.
Either way both classes have their own unique uses and as such, we can see them being put to great use.