Raise Capital TW

Raising Capital

For decades, finding capital to support one’s business idea required applying for a bank loan or requesting donations from friends and family. Some entrepreneurs might attempt to acquire funds from venture capital and equity firms, which can be extremely difficult. Until 2012, entrepreneurs and startups were also not allowed to advertise to the general public for investments.

JOBS Act

In April 2012, with bipartisan support, the United States government passed the Jumpstart Our Business Startups Act. This law made landmark changes for small businesses, loosening several regulations previously mandated by the Securities and Exchange Commission.

Among these changes was greater access to crowdfunding under Title III, allowing startups to raise up to $5 million by pooling the resources of an unlimited number of investors. The JOBS Act created a new category of “emerging growth companies,” defined as those that issue stock with total annual gross revenues of fewer than $1 billion for the previous fiscal year. The JOBS Act also eased oversight and reporting requirements for this new class of companies. Businesses are also now allowed to solicit investments for themselves through traditional advertising channels such as radio, television, and newspaper/magazine ads. Businesses can also now advertise their investment offerings via the Internet, using social media sites such as Facebook, Linkedin, and Instagram, along with non-traditional media like podcasts.

Title IV of the JOBS Act expands a category under the rule known as Regulation A+, which allows private companies to raise up to $75 million from the general public, including both accredited and non-accredited investors. Reg A+ offerings are an alternative to a small registered IPO and are exempt from registration under the Securities Act of 1933.

The SEC created a new Rule 506(c) under Regulation D for private placements, allowing solicitation of offers to accredited investors, a significant departure from the previous Rule 506(B) which had prohibited any sort of general solicitation. With these regulations, issuers can raise capital much more easily. Netshares offers a complete web-enabled investing platform where issuers can create and market their companies’ investment offerings.

Summary

Regulation A+

  • Maximum Raise (Tier I): $20 million per 12 months; no investor limits
  • Maximum Raise (Tier II): $75 million per 12 months; non-accredited investors can invest the greater of ten percent of their income or net worth
  • Permitted Investors: anyone can invest
  • General Solicitation: permitted (public advertisement allowed); promote a prepared offering to the public
  • Testing the Waters: permitted; search and examine the market for potential investors before an offering is ready

Regulation CF

  • Maximum Raise: $5 million per 12 months; investor limits based on income and net worth
  • Permitted Investors: anyone can invest
  • General Solicitation: permitted (public advertisement allowed); promote a prepared offering to the public
  • Testing the Waters: Permitted

Regulation D

  • Maximum Raise: unlimited; no limit on how much an accredited investor can invest
  • Permitted Investors: limited to accredited investors only
  • General solicitation: permitted (public advertisement allowed): promote a prepared offering to the public
  • Testing the Waters: permitted; search and examine the market for potential investors before an offering is ready

How Crowdfunding Works

Equity crowdfunding requires the use of a broker-dealer or qualified funding portal and cannot be performed without one of these platforms.

Crowdfunding allows issuers to maintain more control of their business than acquiring funds via venture capital. If equities are distributed to many investors instead of one or a few, said investors will have less influence over a business's day-to-day operations. Crowdfunding also creates a multitude of new advocates for a business and helps build brand awareness.

Investment Offering Steps:

  • Consultation: determine a business’ best path toward raising capital by evaluating industry trends and long-term goals
  • Determining offerings and security types most beneficial to a business
  • Sign engagement: issuers approve terms of engagement with Netshares. An attorney may be helpful in some cases
  • Offering and marketing materials: Netshares gathers information needed for SEC review, including financial statements, ownership documentation, and marketing materials
  • File regulatory filing and launch campaign: capital raise campaign is open for investment and must remain open for a minimum of 21 days
  • Market offering to investors: varies for every business dependent on the situation
  • For businesses with an established base of customers, marketing to this group is a great start. Businesses might advertise on their websites, at locations, or via email informing customers of their offerings
  • Businesses can also market their offerings using a targeted advertising campaign via social media sites like Facebook and Instagram, informing a broad range of people.
  • Businesses can also follow a more traditional route of using a broker-dealer like Netshares to communicate their offer to investors.

When using Netshares’ crowdfunding portal, issuers must follow certain guidelines at each stage of acquiring capital:

  • Investment funds deposited into an escrow account: investors are providing a commitment to participate in a business’ capital raise, and their money is moved into an escrow account. Investors have the option to withdraw their commitment until 48 hours prior to an offering’s close, which may cause the committed capital amount to fluctuate
  • Minimum goal reached, unlocking funds from escrow: if a business does not reach its offering’s minimum goal, its campaign is considered unsuccessful, and any funds acquired are returned to investors. If a company reaches its minimum funding goal, money becomes accessible to the company via a rolling close
  • Maximum raise goal reached: if a business reaches its offering’s maximum goal, Netshares’ portal will stop accepting new investments, but offering must remain open until the end of its preset offering period.
  • Capital raise closed: during a business’ offering’s close, the company will receive funds from its escrow account, and investors will receive documentation of their security ownership