Startup funding and investing in startup businesses in not restricted to commercial and institutional investors only. 2015 has seen revolutionary developments in angel investing by bringing in more middle-class investors to the market.
Major developments happened after July 2015 when Regulation A+ came into effect. Under Regulation A+, the companies can now raise up to $50 million using a mini-IPO. Mini-IPO is different from traditional IPO in a way that it is less vigorous in operations and more intensive in profits. Traditional IPO has low ceiling of $5 million only which neither attracts more investors nor gather them under one roof. On the other hand, mini-IPO is something which has already started showing benchmark of successes just after a few months of this latest transition.
What’s Different in Regulation A+?
For investors, the reformulated mini-IPO and Regulation A+ are nothing less than living in heaven. It is believed that every investor should consider mini-IPO for following reasons.
- Mini-IPO allows the established investor networks to reward their customers by offering them shares in investments and profits.
- When companies open up for customers and offer them shares, people start believing in them and the networks become more credible. It helps raise brand awareness for investor networks.
- As more people are involved in the business, the investor networks get more options for picking more experienced investors and replacing less experienced investors and managers with the experienced ones. It helps reduce negative competition and improves organizational control.
- For startup investors with exceptional financial resources, mini-IPO is a good way to start angel investment business, gain experience, and step up to traditional IPO.
Apart from mini-IPO, Regulation A+ is also different in a way that anyone is welcomed to make an investment. There are limits for individual investors depending on their net or annual worth but investors also don’t need accreditation for making an investment.
There is also a small sector of investors and critics who believe that it takes a lot of time and money for document processing in Regulation A+ as compared to Regulation D.
New Rules for Open Access to Equity Crowdfunding
The federal regulators have introduced new crowdfunding rules to facilitate small scale investors. During the voting process, the Securities and Exchange Commission decided with open access to equity crowdfunding after 3-1 votes.
Rules for Consumers
The new rules include provision of 2011 JOBS Act which includes certain conditions under which the investors will be excluded from conditions and rules set by the SEC. It will also allow small scale startup firms to raise bigger amounts of money in crowdfunding i.e. up to $1 million.
2011 JOBS Act also eliminates accreditation requirements for investors. The amount of investment depends on the net or annual income of an individual. People with net annual income of $100K or above are allowed to invest up to 10% of their income. But people under $100K annual income can invest up to 5% of their income only. The Act also applies the condition of maintaining crowdfunded securities for at least one year after starting to invest.
Another important rule is about purchasing crowdfunded securities. The investors cannot purchase securities from a random person on streets. They need to purchase the securities only from a registered funding portal or an intermediary broker-dealer.
Rules for Firms and Networks
Apart from the consumer requirements, the firms and networks seeking crowdfunding investors also need to have a look on updated requirements.
Firms and networks looking for $100K or less than $100K crowdfunds can do it freely. But firms and networks willing to raise more than $100K up to $500K range need to conduct an external financial review. There are no specific auditing requirements set for financial reviewing. But firms that are looking to raise more than $500K up to $1 Million need to conduct external financial review as well as external auditing of the reviewed files.
How Powerful is Regulation A+?
Micheal Piwowar, the only dissenting vote of SEC raised doubts about what Regulation A+ has in its way. According to Piwowar, the modified rules of SEC are nothing but a complex web of conditions and requirements that will make it difficult for small business owners and investors to seek business and enter big markets.
Another doubt associated with new rules is about the impact of Regulation A+. Small investors are at a huge risk of getting influenced by supersized success stories like that of Uber.
As Regulation A+ will complicate things for small investors and negatively influence startup businesses, the investors are likely to lose their crowdfunded money by investing it in rare or very new businesses.
But on SEC’s part, the organization is completely neutral and firmly holding onto the ‘wait and watch’ rule to see the impact of Regulation A+.
Investment Records in the Fourth Week of October
Regionally, the United States dominated with 97% investment. Canada and Europe excluding Asia showed 1% investment ratio. Asia excluding China also showed 1% investment ratio. The total investment activity in the fourth week of October was of $747 million with $724.3 million in the United States and $4.0 million in Canada.
Based on dollar amount, the top 5 investments in the fourth week of October include $452.0 million for Lancope, $150.0 million for Social Finance, $60.0 million for Alteryx Inc., $34.40 million for The Bancorp and $11.0 million for Pendo. Lancope was snapped up by Cisco which is looking forward to further beef up networking prowess with an analytical eye on the market. The snapping of Social Finance was held by China’s Renren.
In reference to above statistics, we can say that angel investors are all set to take wing from the masses and become industry leads. Regulation A+ has yet to show its long-term market effects but SEC is determined to make it work by introducing new and remodeled rules for more flexible investing and financing options.