By David Drake
All startups need capital to innovate, launch, scale and grow. For companies seeking additional financing for their working capital or to expand its operations but do not yet want to risk an IPO, using the newly approved Regulation A+ is a possible alternative. Ben & Jerry’s Homemade Inc. (BJICA) is one firm that was able to successfully raise $750,000 from 1800 ice cream lovers within 60 days by employing the mandates of the former Regulation A offering with all its cumbersome procedures.
One of the leading real estate #crowdfunding platforms, Fundrise, also used Regulation A to raise funds for its first project in Washington DC called Maketto, an old building renovated and converted into a communal market where people converge and socialize as well. They purchased the building using their own money and raised $350,000 from 175 investors at $100 per share for the renovation. Its second Regulation A offering was for 906 H Street NE LLC in Washington DC. Fundrise raised $350,000 from the crowd, with $182,400 raised 2 days after offering went live. For its 3rd Regulation A offering in 2014, Fundrise chose the property at 1539 7th Street NW, Washington DC. Estimated project cost was $2 million, with $350,000 made available for general public investing for as little as $100 per share.
Regulation A+ is an upgrade/improvement on Regulation A. With Reg A, $5 million can be raised in an offering from unaccredited investors, subject to state blue sky laws. On the other hand, using Tier 2 (exempted from state blue sky law) of Reg A+ companies can raise up to $50 million online as capital; and only $20 million under Tier 1, subject to blue sky law (reviews and fees) but will not file audited accounts with SEC. Firms undergo a cumbersome, tiring and expensive process using Reg A rules. With the newly enacted Reg A+, the firms have two options to choose from – the amount to be raised and how to go about it.
Last 21 May 2015, experts and thought leaders on Regulation A+, Crowdfunding and the Jumpstart Our Business Startups (JOBS) Act, as well as entrepreneurs, investors, angels, heads of venture capital firms, and industry professionals converged in New York City in a Master Class to discuss the nuances and opportunities brought about by the newly approved Regulation A+. This event brought together crowdfunding stakeholders who deliberated the viability of the new regulation and how it can successfully be applied in raising up to $50 million in capital.
I moderated the first panel wherein we discussed “Why startups should not ignore Regulation A+”. Alysse Romero, Investor Representative for American Homeowner Preservation LLC, Allen Shayanfekr, Co-Founder of Sharestates and Scott Andersen, FinLawyer and ConsultDA partner, were panelists. Scott Andersen said, “It is still expensive to invest using Regulation A+ in comparison to a Reg D offering. Keep in mind only a handful of lawyers in North America during the last five years have actually prepared an offering using Reg A, and now with its broader scope and possibilities as Reg A+, attorneys are estimating total costs for conducting an offering, including obtaining an audit and making periodic disclosures, will be in the $75,000 range.” Allen Shayanfekr stated that the event was a blast and very educational for people who weren’t familiar with Regulation A+. He said the two most important takeaways for him were: “First, if you can do a private offering rather than a public one, you should stick to the private. It’s cheaper, faster, and with fewer reporting requirements. Second, if you decide to do a public offering – be prepared for a long process and also make sure you have an anchor investor to legitimize your raise.” Alysee Romero added that “the most transparent way to raise capital is to have a following, people who connect with you, your business, and your service or product etc. To get someone to emotionally connect is the most simplistic way to sell. It is also imperative to make sure your employees and partners are also passionate about what service/product you are offering.”
Panel 2 discussed “How crowdfunding fits within the current Angel Investors and Venture Capital landscape”. Joe Rubin, Director and Co-Founder of FundingPost, was the moderator, with panelists: Alan McGlade, Managing Director of Digital Entertainment Ventures; Brad Kayton, Angel Investor of Launchpad; Katherine O’Neill, Executive Director of JumpStart New Jersey Angel Network and Nick Jekogian, Founder & CEO of Signature Group Investments.
The 3rd Panel discussed the impact of Regulation A+ on real estate crowdfunding. Scott Purcell, CEO of FundAmerica, served as moderator. Brian Newman, Director of Business Development in Prodigy Network, and Bruce Lipnick, Chairman and CEO of Crowd Alliance and Asset Alliance, and I served as panelists. Regulation A+, according to Scott Purcell, “has the potential to become a game-changer for medium sized businesses that need strategic capital to grow.” Purcell mentioned ways on how firms in the ecosystem like FundAmerica are helping to reduce these costs. Because of the technology involved in offering securities online, it is great to know that firms like FundAmerica are providing tools and services to make it as easy as possible for online platforms to serve their customers and be compliant to regulations.
The entrepreneurs and investors found the insights from the panel discussions to be an eye-opener. The straightforward steps and formula for online syndication and financing provided by the securities and regulatory experts on the newly revised Regulation A+ were educational and informative. Now everyone is in a wait-and-see mode on how the use and execution of the Regulation A+ will unfold in the next 6 months. It is interesting to note who will follow the footsteps of firms like Ben & Jerry’s and Fundrise who were able to use the old version of this regulation successfully. By then, we will be able to see which firms out there are willing to take this route and who will be the lawyers they will partner with to efficiently raise capital.
The event sponsors included Belluci Napoli, Madame Paulette, FinLawyer and ConsultDA. Join us this June 25, 2015, for more discussions on Regulation A+ in the real estate crowdfunding conference we are holding in New York City. It is a Master Class and limited to 30 people only. With all the rules in place, who do you think would benefit greatly in taking this new method of capital acquisition?
David Drake is the Chairman of LDJ Capital, private equity advisory; Victoria Partners, a 110 family office network; Drake Hospitality Group; and The Soho Loft Media Groupwith divisions Victoria Global Communications, Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.