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Crowdfunding Regulations

It has never been easier for a startup or small business to work with investors to fund the growth of their company through the sale of shares. New crowd funding regulations, and the hundreds of platforms created to facilitate crowd funding, are enabling startups and accredited investors to find one another more easily and cost effectively than ever before.

 

If you are planning to raise money to start or grow a new business, it is imperative that you understand how new SEC regulations impact you, and how new investor-entrepreneur matching sites should be used, because these tools can save you time, money and frustration as you search for equity investment.

 

Regulation D Private Placements, Accredited Investors & General Solicitation

The Securities Act of 1933 featured a Regulation D which offered a set of exemptions designed to let entrepreneurs raise money to fund their business without being subject to the expensive and onerous requirements that govern public offerings and and share purchases executed on public stock exchanges. Initially the objective was simply to allow someone to accept investment from friends, family, and those they had done business with in the past. After all, someone accepting $50,000 from three people to help him buy a piece of property valued at $200,000 is significantly different from a multi-billion dollar company raising hundreds of millions by selling shares to tens of thousands of people. If the same rules applied to both kinds of businesses, small companies would never get off the ground.

 

In order to understand Regulation D rules and how they have changed it is important to understand two terms, "accredited investor" and "general solicitation".

 

An accredited investor is someone who has a net worth of at least one million US dollars, not including the value of their primary residence or has earned $200,000 in income each year for the last two years (or $300,000 together with their spouse if married) and who expects to earn the same amount this year.

 

General solicitation of an investment opportunity has previously been interpreted by the SEC to include any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television and radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. In assessing whether or not an entrepreneur has illegally "solicited" investment, the SEC has looked to see if the entrepreneur and investor had a relationship prior to the discussion of any investment opportunity.

 

Most of the Regulations D rules have revolved around who investment opportunities were being presented to and how they were being presented.

 

504, 505 & 506 Exemptions

Regulation D Exemptions come in three varieties, 504, 505 and 506. An entrepreneur can raise $1M in 12 months with a 504 exemption, up to $5M in 12 months with a 505 exemption, and an unlimited amount of money in a 12 month period with a Regulation D 506 exemption.

 

Each numbered exemption comes with a set of rules the entrepreneur must follow when presenting his opportunity to investors. They describe what business information must be provided, which government agencies must be notified, and how investors can certify that they are accredited and thus eligible to buy shares in the company.

 

Some states require no registration at all for a Regulation D private placement, some require registration only for those raising money under Reg 504 and 505 exemptions, and some states require registration for any Regulation D private offering created or offered to citizens of their state. At the national level, the SEC requires you to file Form D whenever you raise money under Regulation D, but this is a fairly short and straight forward document you can file online.

 

Crowd Funding Rules Announced in 2012 Change Everything

In the Jobs Act of 2012 new rules were announced that allow entrepreneurs to promote their investment opportunity on funding portals that pre-screen investors to ensure they are accredited. There are now hundreds of crowd funding platforms where young businesses are raising hundreds of thousands, or millions, to fund their growth. It has never been easier for an entrepreneur to find accredited investors, pitch them, or accept investment from them. Furthermore entrepreneurs can now advertise and promote their opportunities through general advertising and media methods as long as only accredited investors are allowed to buy shares.

 

As of February 2014, not all of the Jobs Act provisions have been implemented by the SEC.

 

Later this year people who cannot meet the "accredited investor" standard may be able to invest in some private placements as Regulation D rules are further loosened.

 

In Conclusion

If you own a startup or small business you should take the time required to learn how to raise money through a Regulation D Private Placement and crowd funding portals because it is may be the fastest and least expensive way for you to acquire the capital your company needs to grow.

 

Detailed guidance about crowd funding and the changes to Regulation D can be found on the United States Securities and Exchange Commission website.

 

Retailers Forum encourages our readers to start or grow their businesses through alternative financing like crowdfunding and encourage you to make smart decisions about your money. Brought to you by the number one publication for Wholesale Merchandise.