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Inc. – Why Cash Is Pouring into Small Companies

Why Cash Is Pouring into Small Companies
The SEC’s new fundraising rules for private companies are scarcely three weeks old, but already they’re helping entrepreneurs raise the cash they need.

 

SOURCE: INC.

 

New rules for raising money are already having a big impact on some small companies.

The regulations allow companies to solicit and take equity investments from so-called non-accredited investors whose net worth is below earlier regulatory thresholds. They were passed by the Securities and Exchange Commission in March under title IV of the Jumpstart Our Business Startups (JOBS) Act and referred to as Regulation A+. Previously, private companies could not generally advertise to these investors about stock sales.

Now they can, with some limits. And many investors appear to be jumping at the opportunity to buy stock in promising startups.

Just ask automobile maker Elio Motors, based in Phoenix. Since June 19, when the change went into effect, Elio has commitments for close to $18 million from non-accredited investors, through equity crowdfunding site StartEngine.

“Regulation A+ is a turning point for creating new companies and jobs for our country,” says Paul Elio, the founder and chief executive of Elio.

The money will allow Elio to finish building and testing prototypes of its three-wheeled car, and will allow it to start building the cars themselves, which requires an estimated $100 million. Non-accredited investors can purchase shares of the company for as little as $100.

Generally speaking, the SEC has altered its older Regulation A, which allowed private companies to solicit funding from wealthy investor for up to $5 million. Now private companies can raise money in two tiers, up to $20 million and up to $50 million. For companies seeking funding under the first tier, however, they must clear their equity sale with all of the states in which they intend to seek investors, which is a potentially time-consuming process. Companies seeking up to $50 million can skip that process, but they must submit audited financial statements and semi-annual reports to the SEC, which is a potentially pricey undertaking.

As for the non-accredited investors, they are limited to investing no more than 10 percent of either their annual net income or net worth, whichever is greater, in offerings up to $50 million. (An accredited investor has a net worth of $1 million, or an annual income of $200,000. A non-accredited investor has a net worth or annual income less than that amount.)

And for crowdfunding site StartEngine, the interest in Elio shows the pent-up demand that smaller investors have for startups, as well as the flaws of the older rules.

“We never thought it was a great fit limiting investment to accredited investors, and we waited for Title IV to come around, because we believed that created an opportunity for 94 percent of the population to invest in these companies,” says Ron Miller, a serial entrepreneur and founder of StartEngine, a crowdfunding site that caters to non-accredited investors.

Since launching on June 19, Miller says, the site has signed up 5,000 investors and five business opportunities, including a gaming company and a loyalty-and-incentive marketing company. Most investors have chosen to invest in Elio Motors to date, however.

Regulation A+ opens yet another opportunity for small companies. And that is to list their shares on secondary market exchanges such as OTC Markets, which potentially gives their investors more liquidity with the stocks they own.

“The OTC is marketing itself as the marketplace of choice if you do a mini-IPO,” says Pamela Greene, a partner in the securities and capital markets group for law firm Mintz Levin in New York, referring to the name given to fund raises under the new regulations, which are akin to public offerings.

Founders of more established crowdfunding sites that cater to accredited investors, however, look somewhat askance at Regulation A+. Rory Eakin, founder and chief operating officer of Circleup, which allows accredited investors to invest in consumer products companies, says Regulation A will add additional time and cost to a company’s fundraising efforts.

“Most issuers will continue to work with Regulation D,” Eakin says, referring to a less costly, longtime fundraising regulation governing how private companies raise money from accredited investors without having to file a registration statement with the SEC.

That certainly rings true for David Johnson, chief operating and financial officer of Fireman’s Brew. The five-employee microbrewery in Woodland Hills, California, is in the process of raising $5 million to expand its operations. But it’s using Regulation D, not the new Regulation A+.

“We would need to get a state by state approval for Regulation A,” Johnson says. “And we are achieving the same goal with Regulation D, without having the added expense.”

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