Using Regulation A to Raise Capital

Article written by EricBank

Like thoroughbreds chomping at their bits on the starting line, small business owners are keenly awaiting the SEC's final release of equity crowdfunding regulations. It's been a long wait -- the JOBS Act mandated the new financing mechanism over two years ago.

No Time to Wait

Some entrepreneurs have not been content to cool their heels while the SEC labors over its task. To raise capital, many continue to place unregistered securities privately via Regulation D. What some don't realize is that there are a few other alternatives for issuing stock without an IPO. Dan and Ben Miller, real-estate developer brothers based in Washington, D. C, have been successful using Regulation A to raise money for projects. Their first foray into Reg A financing created a pot of $325,000 from 175 investors. They used the money to convert a 5,000 square foot warehouse, but the process wasn't easy.

Regulation A

Reg A gives entrepreneurs a safe haven for issuing non-registered securities, but it differs from Reg D in several ways. Reg A is like a mini-IPO, albeit with a fundraising cap of $5 million per year. Here are some key facts about Reg A:

·       You must file SEC Form 1-A, which contains an offering circular (much like a prospectus), a notification and several required exhibits

·       There are three Form 1-A formats to choose form, including a simplified Q&A version

·       You must also file for approval from the states in which you plan to accept investors

·       You can market the securities publicly, much like Rule 506 securities under Reg D

·       Unlike Reg D securities, Reg A securities are not restricted -- in most cases, investors can resell up to $1.5 million of these securities

·       Reg A financial statements requirements are simpler than those for IPOs

·       You can make small investments and you don't have to be an accredited investor

·       The issuer does not fall under the reporting requirements of The 1934 Exchange Act nor the Sarbanes-Oxley Act

·       Reg A offers unique provisions for "testing the waters"

Making a Test Run

Under Reg A, a company can distribute marketing information before filing an offering statement with the SEC. This allows a company to gauge interest in the offering before they have to shell out for accountants, lawyers and other worthies necessary to prepare an offering statement. While you can collect commitments before filing the offering, money can't change hands until the filing is made, approved and distributed.

The Rise of Fundrise

The Millers realized that the software they developed to manage the Reg A application process was of great general interest to other real estate developers. In response to that interest, they built Fundrise as the first "curated and vetted platform" for real estate fundraising. It is, in effect, a crowdfunding portal that uses Reg A and Reg D instead of the JOBS Act rules -- that is, until the JOBS Act rules become effective. Investors participate by purchasing preferred equity or mezzanine debt. The real estate developer pays Fundrise 2 percent of funds raised and an origination fee. Investors pay a 0.3 percent service charge.