Mini-IPO? New SEC regulations open fundraising for small businesses
As the Securities and Exchange Commission's new Regulation A+ rules go into effect on Friday, some smaller businesses may be considering new routes to funding.
On Friday, new Securities and Exchange Commission (SEC) regulations allowing smaller companies to more easily raise money from the public through "mini-IPOs" subject to less scrutiny could raise the ceiling on funding for companies and open the door to smaller investors.
The new regulations represent a change to the little-used Regulation A law which allowed companies to raise up to $5 million, but included hurdles, including registering offerings in each state they were sold. Regulation A+, introduced as a part of the 2012 JOBS Act, will enable companies to raise up to $50 million from the general public in any 12-month period, while eliminating some of Regulation A's difficult registration rules.
Regulation A+ also allows those funds to be raised from the general public, not just accredited investors.
Under previous regulations, only accredited investors were allowed to invest. Accredited investors are those individuals who earn more than $200,000 per year, or have a net worth of greater than $1,000,000. Now, anyone can invest, albeit with some limitations as to the amount.
To raise up to $50 million under a Regulation A+ Tier-2 "mini-IPO," a company must have at least two years of audited financial records. The SEC then has to review the filed documents and grant approval before any company can start to raise capital.
While some hail the changes as a relief to small businesses struggling to overcome the time consuming process and heavy cost of smaller funding options, others see it as too little too late.
Syndicated radio show host, small business expert, and Author of “The Age of the Customer,” Jim Blasingame, says in an interview that while this is good news for those already interested in taking their company public, “it’s not a panacea for small businesses or the economy.”
“If a business was already inclined to go public, it will help them. But what bothers me about the JOBS Act is that people think it’s going to turn the economy around and open up access to capital,” Mr. Blasingame says. “It’s actually a small advantage in terms of the overall small business sector and the Main Street economy. This is only going to help a very small percentage of small businesses, including startups. The world is awash in investor money. Venture capitalists are stumbling over themselves to invest money, so this might not even be the best way to go.”
Blasingame also points out that the process of taking a company public via A+ isn’t cheap, costing approximately $100,000 or more in legal, accounting, and marketing fees to file paperwork with the SEC to start the process of a Regulation A+ "mini-IPO."
However, Kendall Almerico founder of BankRoll, a website which launched in tandem with the new A+ law, to serve as a platform for small businesses to either test the waters or raise funds sees the new law as a boon.
“The real magic here with the A+ law is the elimination of the need for adhering to individual state-to-state compliance of Blue Sky laws,” says Mr. Almerico says in an interview. “Just imagine having to file in all 50 states and then waiting and waiting for each individual state to approve. That’s how it’s been forever.”
Blue Sky laws are state regulations “designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details.”
The new law, however, also allows businesses to test the waters to gauge public interest in the investment and enter into conversations with potential investors prior to filing.
“What we are doing with BankRoll is giving companies the option of skipping the other steps and testing the waters, which becomes legal as of Friday the 19th, via our website before they have taken any of the other steps and before investing something in the ballpark of $100,000 on all the other steps,” he says.
StarShop is Mr. Harrington’s new e-commerce venture that utilizes celebrities who appear in short videos promoting celebrity owned or endorsed products.
"I am excited to use the new Mini-IPO law to give our fans a chance to invest with us in StarShop,” writes Harrington in an e-mail. “In the past, unless you were rich or connected to Wall Street, most people couldn’t invest in companies at this early stage. Because this new law came into effect this month, I wanted fans of StarShop to have a chance to get in at the ground floor.”
Blasingame says the advantage of going public is for startups and other small firms that need to scale faster than earnings and debt can take them. However, going public makes the business founder beholden to shareholders, whose influence can be constricting.
“I know plenty of small businesses who went public and now wish they could turn back the clock and have the kind of control they used to enjoy,” Blasingame cautions. “But whether you’re crowdfunding or creating a mini-IPO you still have investors. You’re still diluting your ownership. It’s something to think about before jumping in. Not everyone wants to be in the Shark Tank.”