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Who doesn’t want to get in on the ground floor of the next big thing? As of today, startups are allowed to raise money in a new way – a mini-IPO open to the public.
Back in the old days (the days before today) only accredited investors (read: rich people) were allowed to invest in startups. You had to have assets above a million dollars excluding your home, or prove an income of $200k over the course of two years. Well, with a change in rules from the Security and Exchange Commission that came into effect today, these rules no longer apply.
Regulation A+ allows startups to circumvent venture capitalists and hold an initial public offering that is truly open to the public. There are now two ways a company can hold a mini-IPO. If they file under Tier 1, the company can raise up to $20 million, but they must also file in every state they want to raise money in – an exhausting proposition. Under Tier 2 companies can raise up to $50 million, however companies are required to provide financial audits and submit two financial reports a year.
It’s a complex system, and to get a better grasp on it we reached out to some people who know what they’re talking about. SeedInvest, which recently opened a local office here in Denver, is an online startup-investing platform. Think about it kind of like Kickstarter – only way more intense. Anyway, we spoke with SeedInvest’s Managing Director here in Colorado, Sara Baris, to get some tips for startups who might be considering a mini-IPO.
Here’s what she had to say:
Reg A+ is a best fit for companies raising at least $5M-$10M.
Startups looking to raise capital via a Reg A+ offering will face $100,000+ in expenses and a 3-6 month time commitment. Additional financial audits and disclosures required after the raise will further increase costs for companies. Because of this, Reg A+ is best suited for companies raising at least $5M-$10M.
Companies can “test the waters.”
Before committing to a Reg A+ offering, startups will have the opportunity to “test the waters.” This will allow companies to gauge investor interest and determine if a Reg A+ offering makes financial sense before investing in legal and accounting fees.
Reg A+ will require SEC filings.
Companies wanting to raise via Reg A+ will need to file their raise with the SEC. All offering documents, solicitation materials, and audited financials must be submitted to and approved by the SEC. Additionally, the round’s closing must be approved by the SEC, possibly slowing the closing process. Companies raising under Tier I will also need to file their offering with NASAA for their coordinated review process.
Tier II offerings will require ongoing disclosure requirements.
Offerings up to $20mil will be classified as Tier I and offerings between $20mil and $50mil will be classified as Tier II. Companies that raise capital using Tier II of Reg A+ will be subject to ongoing disclosure requirements. This includes annual disclosure filings, semi-annual reports, and current reports. These reports will require audited financials, an additional step companies considering a Reg A+ offering must be sure they are adequately prepared for.
Reg A+ allows your customers to become shareholders.
While a startup must dedicate significant time and resources to a Reg A+ offering, the reward is substantial. Reg A+ is an opportunity for the early adopters who helped grow a startup to share in the financial success of their favorite company. Once they have a financial stake in the outcome of the company, a startup’s customers are more likely to become brand evangelists. These shareholding customers will work to raise the startup’s profile and spend their dollars in a manner which benefits both their portfolio and the company they are invested in.
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