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Are You Ready for the Next Age of
Crowdfunding?
BY ROB MARVIN
MAY 19, 2016
HTTP://WWW.PCMAG.COM/ARTICLE/344545/ARE-YOU-READY-FOR-THE-NEXT-AGE-OF-CROWDFUNDING
New regulations open the crowdfunding space to small business, a big pool of new investors, and
a lot more money.
In Part One of our explainer on the government-regulated crowdfunding
investment space, we talked about how businesses and investors should navigate
the now-regulated crowdfunding landscape.
Entrepreneurs and start-ups that have never had access to traditional venture
capital funding can now raise up to $1 million through online Regulation
Crowdfunding (Reg CF) portals, and middle-class non-accredited investors can
contribute 5-10 percent of their income per year in Reg CF offerings, depending
on their net worth.
But Reg CF is only one side of the equity crowdfunding coin, which also
includes something known as Regulation A+ (Reg A+).
To start, equity crowdfunding means online investors actually get a stake in the
start-up or SMB as opposed to traditional nonprofit crowdfunding platforms like
Kickstarter and Indiegogo, which are easy ways to lose your money.
Reg CF and Reg A+ are part of the 2012 Jumpstart Our Business
Startups (JOBS) Act, which has been reworked and updated over the past

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several years to address the crowdfunding economy and encourage new forms of
protected, regulated start-up and SMB funding and investment. Reg CF is Title
III and Reg A+, which went into effect in 2015, is Title IV.
"The entire purpose of Regulation Crowdfunding is to allow emerging
companies to raise capital faster, cheaper, and more efficiently than ever before,
and we are optimistic that over time, this will be prove to be the case," said
Darren Marble, CEO of digital marketing agency CrowdfundX.
A Quick Explainer on Reg A+ and Reg CF
PCMag has a detailed explanation on how Reg A+ works and how accredited
Reg A+ portals operate, but the gist is that compared to Reg CF, Reg A+ deals
in higher funding amounts that are more tightly regulated.
Both regulations deal with unaccredited investors as opposed to traditional VC
investors, private equity firms, and hedge funds. But Reg A+ requires full SEC
approval of each offering (as opposed to formally notifying the SEC of a Reg
CF offering), and two years' worth of audited financial data. Investors also have
to self-certify their net worth before they can start putting money down.
Reg A+ has two funding tiers: Tier 1 caps the maximum amount a business can
raise per year at $20 million and Tier 2 at $50 million. Funding portals must
register separately with the SEC and FINRA as expressly Reg CF or Reg A+
marketplaces (though you can be both). There are no limits on how much
individuals can invest in Tier 1 offerings, but Tier 2 investments are limited to a
maximum of either 10 percent of the investor's net worth or net income,
whichever is higher.
Rod Turner, founder and CEO of approved Reg A+ crowdfunding
portal Manhattan Street Capital (MSC) said Reg CF is more like a
traditional seed round, while Reg A+ fills the role of a much heftier Series A, B,
or C funding round. There are no restrictions stating a company can't raise a Reg
CF round this year, and a Reg A+ round a year or two later.

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"Title III is essentially seed financing; you don't need wealthy friends and
relatives, you don't need access to angel investors," said Turner. "[The
regulation] is filling a great need both from companies that had no real chance
because of their geography, and for smaller businesses looking to raise an
amount too small for VCs or angel investors to consider. With Title III you can
be in podunk nowhere and as long as you market your product well and it's
appealing to consumers, you can raise capital."
MSC measures Reg A+ statistics monthly. Its latest report found that
the number of mid-stage companies and mature start-ups adopting Regulation
A+ funding is currently at approximately 116, with the aggregate capital of all
those intended raises adding up to $1.9 billion, up from $1.2 billion in January.
To get a sense of the vast difference in scale between Reg CF and Reg A+, look
no further than Mark Cuban. Speaking recently at the Salt Conference, the
entrepreneur, investor, and Shark Tank host told attendees at the hedge fund
summit that Reg A+ is a huge opportunity to counter Silicon Valley VC culture
with a new way for businesses to raise significant capital.
"The SEC has Reg A+, which simplifies the paperwork for [a] $25 million or
$50 million offering. These rules with Reg A+ have just been crystallized
recently and there is a huge opportunity and I've been talking to folks about
creating a fund that says the goal is to invest in [a] start-up, but part of the effort
is we're going to try to take them public within four to five years," Cuban said,
according to The Street.

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New Money, New Business, New Opportunities
Most coverage of the new crowdfunding regulations has focused on start-ups
and entrepreneurs, but in a way that misses the point. A hot new start-up with
innovative tech or a great-looking growth forecast can always court traditional
VC investment. The companies that can really benefit from the comparatively
small investment limits of Reg CF are under-the-radar small businesses that
have been around a while, have a stable business plan, and just need that extra
push.
Jeff Koeppel, Of Counsel with the Law Offices of Kirk Halpin & Associates,
P.A, advises public and private companies on private equity and debt issuances,
corporate governance, contracts, deal structuring, joint ventures, and other
corporate and securities matters. He said as this space matures, Regulation
Crowdfunding will be particularly helpful to mature small businesses with a
financial track record and a solid local presence seeking to raise a small amount
of capital. Maybe it's hiring new employees or expanding to new local retail
locations, or maybe a manufacturer wants to expand the factory floor or buy
new equipment.
"These are the folks whose bank line of credit was cancelled in the last financial
downturn or who don't want to pay the rate being charged. It may be a local
music store, dry cleaner, or even an auto repair shop that just needs a few
hundred thousand dollars to open a store in another neighborhood," said
Koeppel, who also spent three years at the SEC as a Senior Attorney-Advisor in
the Division of Corporation Finance.
Koeppel pointed to a British crowdfunding site called Crowdcube as a good
example of how this kind of equity crowdfunding should work. Crowdcube took
advantage of UK crowdfunding regulations to introduce something called The
Burrito Bond, which helped Mexican restaurant chain Chilango expand to more
locations in London. The Reg CF-like offering paid investors 8 percent interest
over four years, and raised more than £2 million.

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Crowdcheck CEO Sara Hanks agreed that local small businesses have the most
to gain. Crowdcheck is a due diligence, disclosure, and compliance firm for
online funding and investment, and Hanks is also a corporate and securities
attorney with experience at several law firms as well as the SEC. The firm does
due diligence and compliance filing for both Reg CF and Reg A+ offerings.
As laid out in Part One, established SMBs may also be in a better position to
handle the upfront costs and recurring fees arising from accounting and legal
due diligence and financial reviews. "I see Regulation CF as being helpful for
'Main Street' type businesses that find it very hard to get funding, and yet could
provide meaningful job growth and economic activity if only they could grow,"
said Hanks.
Where Crowdfunded Investment Goes From Here
This new way of investing is still in its infancy. The next months and years will
bring a lot more Reg CF and Reg A+ portals into the space, and businesses all
across the spectrum, from start-ups and SMBs to small to midsize enterprises
(SMEs) looking for a different kind of funding.
Depending on the business, crowdfunding might be a more appealing option
than VCs and traditional investment, even if the start-up has the option. It
requires adherence to SEC and FINRA rules and paying a percentage off the top
to a portal, but Reg CF and Reg A+ leaves founders and owners with full
control of board seats. Equity crowdfunding also lets founders set the values of
their own companies, from how much investors can buy shares for and what the
minimum investment will be.
The next big question is how the big mainstream crowdfunding and VC portals
respond. AngelList, arguably the biggest start-up marketplace out there, is
already embracing Title III with a recently spun-off investment marketplace
dubbed Republic. MSC's Turner added that if Kickstarter, Indiegogo,
RocketHub, Crowdfunder, and the like entered the equity crowdfunding space as
well (though it would require substantial effort on their part to build an entirely

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new SEC-compliant section of their business separate from donation-based
crowdfunding), they'd have the consumer investor base to set the market.
"With Indiegogo, they have such a large scale compared to any other Title III
platform," said Turner. "If they do a good job of making it possible for the
companies making money in Title III to communicate with initial investors
who've been contributing to Indiegogo campaigns for a couple years, that's a
tremendous advantage in what they can offer."
Aside from whether or not Kickstarter and Indiegogo enter the fray, the game
could be about to change even more. The SEC is meeting in the near future to
discuss the re-definition of an "accredited investor" to account for inflation,
which could disqualify up to 40 percent of qualified households in the US based
on net worth.
If a change like that went through, non-accredited investment opportunities like
Reg CF and Reg A+ could become exponentially more popular very quickly. It's
the dawn of an entirely new paradigm for how business ventures are funded in
the United States, and we're definitely not in Kansas anymore.