What Kind of Data is Relevant for Private Equity?

The world of private equity is shrouded in a certain amount of mystery. What data do private equity firms use when making their investment decisions? What kind of research is needed to identify opportunities in this market? With the private equity markets raising over $665 billion in 2021, up from $521 billion in 2020, the use of data for private firms is becoming more crucial than ever. This blog post will look at the data types most relevant for private equity investors and how this information can benefit them in certain situations.

 

The Role of Data in Private Equity

 

Private equity is a type of investment generally reserved for high-net-worth individuals, venture capitalists, and institutional investors. However, these opportunities are being afforded to more individual investors thanks to the JOBS Act. It is an investment strategy that involves buying stakes in companies that are not publicly traded on stock markets. Private equity firms, in particular, typically have a longer time horizon for their investments than other types of investors and often are willing to invest in companies with high growth potential.

 

For these investments, investors may rely heavily on multiple data sources to provide insight and justify investment decisions. These sources may include:

 

  • Financial data is relevant to PE firms because of the need to monitor a company’s financial health. This data can help PE firms identify potential risks and flag companies that may be in trouble. Financial data can also help firms assess a company’s growth potential, allowing them to make more informed investment decisions. 
  • Operational data is relevant to PE firms because it helps them understand a company’s business model and evaluate its efficiency. This data can help firms identify opportunities for cost savings and process improvements. 
  • Market data lets PE firms know what’s happening in specific industries and understand where there might be opportunities for companies they own to gain or lose market share. It also helps firms keep tabs on broader industry trends that could present opportunities or threats to their portfolio companies.
  • Alternative data allows firms to track a company’s performance in real-time and make more informed investment decisions.

 

Data is an essential part of the private equity investment process, which firms must consider when making investment decisions. Private equity firms often rely on proprietary data sources, such as data from the companies they own or have invested in, to make investment decisions. They also use external data sources, such as public market data, to corroborate what they see from their data sources. 

 

The Importance of Data

 

With the increasing importance of various types of data, private equity firms must be able to access and analyze this data to stay ahead of the competition. Firms that can effectively use data will be well-positioned to make informed investment decisions, improve their portfolio companies’ performance, and generate better returns for their investors.

 

Beyond traditional data sources, alternative data is becoming increasingly important for private equity firms. This data can come from various sources and helps PE firms better understand the companies they invest in, make better investment decisions, and provide more hands-on operational support to their portfolio companies. Alternative data can help PE firms corroborate what they are being told and get a complete picture of the company they are interested in investing in. Alternative data can also help with operational decisions after an investment has been made. The ability to crunch a company’s proprietary data and glean insights into broader industry trends is crucial to helping a private equity company increase its market share, improve operational efficiency, and ultimately time the exit correctly. Therefore, a practical application of alternative data can create a virtuous cycle for private equity firms: better investment strategy, selection, execution, management, and realization, driving improved returns and increased LP demand. 

 

Any one source of data may not provide the entire picture of a potential investment, making it critical for private equity investors to analyze a wealth of data before making an investment decision. Overall, data can help to illustrate patterns and opportunities within the private equity space.

The Medtech A+ Team: An Upcoming KoreSummit Event

KoreConX is excited for the upcoming KoreSummit event on Thursday, June 23rd. Our second event focused on the Medtech vertical, Thursday is a half-day event that dives into how Medtech companies can conduct a successful RegA+ offering. Kicking off at 1 PM EST, we’re excited for our KorePartners to join us in covering this exciting topic. Let’s dive into the schedule more below.

 

At 1 PM EST, KoreConX CEO Oscar Jofre will introduce the event with a warm welcome. The first panel at 1:10 PM will begin with an introduction to Reg A+ for a MedTech company. This opening panel features Oscar Jofre, Scot Pantel, and Stephen Brock.

 

Up next at 1:40 PM, five experts will take the virtual stage to talk about the preparation phase including what a Form 1A is and the regulatory requirements you need to complete the filing. Douglas Rurak, Matthew McNamara, Peter Danyeko, Nick Antaki, and Shari Noonan will be speaking on this panel. 

 

At 2:15 PM, the third panel kicks off with a discussion about going live. This panel will cover everything you need to know when preparing your live offering to ensure it is a success and will feature Kiran Gramiella, Shari Noonan, John Hayes, and broker-dealer Amanda Grange. From investor acquisition and issuance tech to broker-dealers, this panel will ensure participants will be prepared for their next capital raise.

 

The fourth panel takes place at 3:00 PM and is about how, when raising capital, it is vital to sell your company’s story, not just the stock. By learning how to tell a story, MedTech companies looking to raise capital will be able to connect with investors on a personal level and have a much better chance of success. Panelists will include Scott Pantel, Andy Angelos, John Hayes, Andrew Corn, and Dawson Russell sharing their wealth of experience on this topic.

 

At 3:40 PM, the 5th panel discusses the importance of a secondary ATS, what it is, and how to pick one that will best suit your needs. Lee Saba, Kiran Garimella, and Peter Danyeko will discuss their experience with ATSs and help you understand why having one is so important. 

 

The event concludes with the final panel at 4:00 PM with a short panel that covers takeaways from the event as well as allows for networking. With this panel, we hope to give event attendees the chance to meet and greet the KoreConX ecosystem of partners, members, and service providers that work with Reg A+ daily. This will include Oscar Jofre, Scot Pantel, Joel Steinmetz, Matthew McNamara, Douglas Ruark, and Stephen Brock.

 

Join us for MedTech A+ Team: How to do a successful Reg A+ for a MedTech company on Thursday, June 23rd, 2022. This event is online and free to attend, which you can register for here. This event is perfect for all MedTech companies that are new or unfamiliar with Reg A+ and those that have completed Reg A+ raises in the past.

There’s a Lot of Private Capital to Go Around

With all the turbulence in the public markets, private markets look even more attractive to investors.  The private markets are 4x the size of public markets. Investors are and will continue to look for investment opportunities and right now, there is a lot of private capital to go around when we see these numbers.

 

A Staggering Amount of Private Capital

 

The private capital available in the world today is staggering. A recent report by Bain & Company found that there is more than $5 trillion of uninvested funds currently available from private equity firms, and this number is only expected to grow in the coming years. With this influx of cash, private equity firms can engage in mega-deals and drive up valuations in the process.

 

The increased availability of private capital is not just limited to traditional private equity firms. Family offices, sovereign wealth funds, and pension funds play a more prominent role in the private equity space and have experienced sweeping changes in 2021. With all this capital available, it’s no wonder that the private market is growing. While some people may be concerned about a potential bubble, it’s important to remember that the private equity industry is still relatively small compared to other asset classes. So even though there may be some risk of over-inflated valuations, the private equity industry still has much room to grow

 

Accessing Private Capital

 

We are witnessing record-breaking investment levels reaching billions of dollars. Several reasons for this influx of cash include:

 

  • Low-interest rates
  • An improving global economy
  • A renewed focus on private equity and venture capital

 

The wealth of private capital available today is staggering and growing. The options for accessing this capital are many and diverse, so there’s no one-size-fits-all solution for each private company looking to raise capital. However, some general guidelines will help you find the right resources for your business. You must understand what stage your company is in. This will help you identify the right kind of capital, as well as the right source of that capital. There are generally four stages of funding for a business:

 

  • Pre-seed Stage: This is when you have an idea but no product or service to sell. You will need to raise funds to develop your concept and bring it to market.
  • Seed Stage: This is when you have a product or service but no sales. You will need funds to finance your product development, marketing, and initial sales efforts.
  • Early Stage: This is when you have initial sales but are not yet profitable. You will need funds to finance your growth and expand your business.
  • Late Stage: This is when you are profitable and looking to scale your business. You will need funds to finance your expansion plans.

 

There are many private capital sources, including family and friends, angel investors, venture capitalists, accredited investors, nonaccredited investors, and private equity firms. Each has its strengths and weaknesses, so it’s essential to understand the differences before approaching them for funding.

 

Additionally, we are even beginning to see a growing player in this market: JOBS Act exceptions. These exemptions, Regulation A+, Regulation CF, and Regulation D, are game-changer for companies and investors alike. These exemptions allow companies to raise significant capital from accredited and nonaccredited investors alike, which continues to widen the pool of potential investors. 

 

The private capital market is booming, with record-breaking investment levels reaching billions of dollars. There are several reasons for this influx of cash, including an improving global economy, low-interest rates, and a renewed focus on private equity and venture capital. Not to mention, the JOBS Act has introduced new sources of capital outside of the traditional VC and private equity round. The everyday investor is showing significant interest in the ability to get in on the ground floor with a promising company to grow their wealth. With so much private capital available, it is time to take advantage of it.

 

Private Equity’s Primetime Has Arrived

Private equity’s primetime has arrived! This stems from a number of reasons, including favorable economic conditions for the private capital market. In fact, 42% of private equity limited partners report a 16% net return in this space. Here are three factors in particular that have caused private equity to outperform public equity in 2022.

 

1) Interest Rates:

A survey found that 71% of global private equity investors have indicated that their equity investments have outperformed their public equity portfolios since the global financial crisis. This is in part because private equity firms are less reliant on debt financing than public companies. Higher borrowing costs will hit public companies harder, putting them at a competitive disadvantage over private companies with rising interest rates.

 

2) Economic Uncertainty:

Some degree of uncertainty characterizes current economic environment. This can be attributed to the ongoing trade conflicts between the United States and China, Brexit, and the coronavirus pandemic. These factors have made it difficult for public companies to make long-term plans and invest for the future. Private equity firms, on the other hand, are better suited to deal with economic uncertainty. This is because they can take a longer-term view and are not as reliant on short-term results.

 

3) Regulation:

The increased regulation of public companies has made it more difficult and expensive for them to operate. Private companies are not subject to the same level of regulation, giving them a competitive advantage. Additionally, private companies can benefit from registration exemptions, like RegA+ and RegCF, which allow them to raise capital from everyday investors without the need to go public. This provides private companies a significant tool they can use to their advantage and fuel their growth.

 

These combined factors show that private equity has arrived and is here to stay. This will likely continue in the future, making private equity an attractive investment for investors. More individuals are involved in the private markets with the rise in forms of private investment for regulated and non-regulated investors, such as the JOBS Act regulations. This means more capital is flowing into private markets, which drives up valuations. With the current market conditions, investors would be wise to allocate a portion of their portfolio to private equity to protect and grow their wealth and prepare their portfolios for the future.

A Distributed Workforce And How To Trust Your Employees

At the Virtual Communication Mastery event on May 26th, 2022, Oscar Jofre, KoreConX President, CEO, and co-founder, was invited to participate in a talk on the importance of building a team from a distributed workforce and how to trust your employees. He spoke about the company culture at KoreConX, which is based on trust and empowering employees to make decisions and how it benefits operations, and how we are seeing more companies embrace the remote model of working.

 

During the interview, the Virtual Communication Mastery hosts spoke to Jofre about how the crowdfunding concept in the US changed how fundraising works and who stakeholders are. “Venture capital is not the only way, there is nothing wrong with not being a venture, and because of COVID, online crowdfunding investment in the US has grown and has become more popular than ever,” said Jofre. He reiterated how there is lots of money sitting available, over $30 trillion, waiting to be invested, but it was difficult for people to support companies they believed in. Now with the JOBS Act regulations, KoreConX does everything compliantly to empower the private capital market so everyone can invest in innovative private companies.

 

This idea of inclusion does not only apply to its investors but also to the company’s employees. KoreConX is seeing companies embracing the distributed model “because it is about productivity.” You want your company to have the best product possible, and by getting the best people to believe in and execute that vision, it does not matter if they are in the same room as you. 

 

In fact, nearly 61% of Americans choose not to go into the workplace, a stark change from earlier in the pandemic.  “In 5-10 years,” says Jofre, “offices will not be the major hub for where people work.” He continued, saying that “with distributed working, we will see more small communities becoming hubs of people working remotely, and we are seeing more traveling because of remote working. Remote work is a very different environment where you do not lose things when you leave.” This allows a company and its employees to stay connected no matter where they are constantly. 

 

A significant concept Oscar believes in is providing to all employees is trust. He believes that “for a distributed team to work productively, there must be trust” between the employer and the employee. The employer trusts that the job will get done, and the employees trust that they can do their job without being micromanaged. By trusting your employees to make business decisions, you empower them to be as invested in the company as you are and improve productivity.

 

Trends We Believe Will Shape Investment Crowdfunding

In the first half of the year, a great deal has happened in investment crowdfunding. We’ve seen several trends emerge that are worth looking at as we move into 2022. These trends can impact everything from how you raise capital, structure your investments, and what kinds of companies you invest in. Here are three trends that we believe will shape investment crowdfunding in the coming year:

 

More support for Alternative Trading Systems (ATSs)

 

Alternative Trading Systems (ATSs) have been around for a while, but they’ve been slow to catch on in the investment crowdfunding space. That’s starting to change, though, as more and more platforms are beginning to see the benefits of using an ATS. An ATS is a platform that allows for the secondary trading of securities, which means that it can be used to buy and sell shares of companies not listed on a traditional stock exchange. One of the benefits of using an ATS is that it gives investors more liquidity for their investments. This means that investors will be able to sell their shares more efficiently and at a better price. ATS will also be a significant player as digital securities continue to evolve and see wider adoption.

 

Another benefit of using an ATS is that it can help to level the playing field for issuers. By using an ATS, issuers will be able to list their securities on a platform that is open to a broader range of investors. We believe that the increased use of ATSs will positively impact crowdfunding investments in the coming year. That’s because ATSs can help make the market more efficient, giving issuers and investors more options, but sweeping regulations are being proposed for alternative trading systems.

 

More focus on Environmental, Social, and Governance (ESG) factors

 

ESG investing is an investment strategy that considers environmental, social, and governance factors. This investing style has been gaining in popularity in recent years, as more and more investors are looking for ways to invest in companies that positively impact the world. We believe that the focus on ESG factors will continue to grow in the coming year as more investors look for ways to align their investments with their values, and crowdfunding can make the most out of this.

 

There are several reasons why we believe that the focus on ESG will continue to grow in the coming year:

  • A recent Gallups study showed that nearly half of the respondents polled are interested in sustainable investments, yet only 25% had heard about it. This could be a significant opportunity for companies looking to raise capital for ESG-focused businesses.
  • We also expect to see more regulation around ESG investing in the coming year. The SEC proposed a rule in March of 2022 requiring any SEC-registered companies to add specific disclosures on periodic reports and registration statements. Companies must also share information on climate-related risks that may impact business. While companies using JOBS Act exemptions are not SEC-registered, this may be an interesting development as investor demand continues to rise.
  • We also expect to see more interest from retail investors in ESG investing. A recent survey by Morgan Stanley found that 75% of millennial investors are interested in sustainable investments. This is a trend that we expect to continue in the coming year as more and more retail investors look for ways to invest in companies that positively impact the world.

 

Impact on Minority Companies

 

The past couple of years have been challenging for many businesses, but it has been especially challenging for minority-owned companies. That’s because the pandemic had a disproportionate impact on minority communities. For example, Black and Latino households have lost more wealth than white households during the pandemic, with 55% of households facing major financial problems. This has led to many people of color rethinking their investment strategies.

 

In addition, traditional financial institutions have long underserved minority-owned companies. Of venture capitalists, only 2% of their portfolio companies had a Latino founder, and 1% were led by a black person in 2017. 2020 data has shown little improvement The pandemic has highlighted just how important it is for minority communities to have access to capital. That’s why we predict that investment crowdfunding will become an increasingly popular way for minority-owned businesses to raise capital in the coming years.

 

Closing Thoughts

 

These three trends we believe will shape investment crowdfunding in the coming years. By understanding these trends, issuers and investors will be better positioned to take advantage of their present opportunities, allowing investors to connect more with businesses that they are passionate about and that align with their values. At the same time, it is also important for us to continue pushing the industry forward, enabling wider access to capital for businesses and more investment opportunities for investors.

It All Started with the JOBS Act

This month, we launched our newest series, KoreTalkX, during which we have hosted exciting, one-on-one conversations with industry experts to expand the knowledge base on capital raising in the private markets. We’re recapping the episodes so far and look forward to the next live event on Tuesday, May 31st, when Dr. Kiran Garimella (CTO, KoreConX) and Andrew Bull (Founding Memeber), Bull Blockchain Law) discuss digital securities. 

 

KoreTalkX #1: 10th Anniversary of the JOBS Act

In this conversation, David Weild IV, Father of the JOBS Act, and Oscar Jofre discuss the importance of the JOBS Act concerning small businesses and entrepreneurship. An important focus has been how the Act has helped increase innovation and expand access to capital for smaller companies, which is crucial for paving a brighter future.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #2: How Can ESG Reshape Capital Raising?

This talk between Peter Daneyko and Paul Karrlsson-Willis, CEO of Justly Markets, discusses impact investing and ESG (environmental, social, and governance) criteria. Since the JOBS Act has allowed more people to invest in companies and given rise to the popularity of crowdfunding and investing for non-accredited investors, they discuss how many people are investing in businesses with missions they’re passionate about. 

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #3: How to Start and Manage a Cap Table?

In this discussion, Amanda Grange and Matthew McNamara, Managing Partner at Assurance Dimensions, talk about starting and managing a cap table. A primary focus is how the SEC compliance guidelines protect companies and how a good transfer agent will help a company stay within those guidelines. They also talk about how a well-managed and structured cap table can streamline a raise.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #4: Thoughts on Investor Acquisition

Jason Futko and Tim Martinez, co-founder of Digital Niche Agency, talk about how to acquire investors for your startup. They highlight how important it is to have a good strategy before launching your campaign and how companies have a powerful opportunity to transform investors and customers into brand ambassadors. Additionally, they suggest entrepreneurs be prepared for a long marathon to achieve success and how to help achieve this in today’s climate.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

Credit Cards, Escrow, and Broker-Dealers for RegA+ = $75 Million for Cannabis Companies

 

“It’s About Time”

 

Up until now, it was a real challenge for Cannabis companies to take advantage of Reg A+ exemptions that allow private companies to raise up to $75 million from the crowd; accredited and non-accredited investors alike.  So you have the investor community’s appetite, the table is set and they are ready, willing, and able; but what else do you need?

 

FINRA Broker-dealer

 

The regulation is meant to create jobs, allow private companies another way to raise capital, and allow for the investor community at large to participate. Before RegA+ exemptions, many potential investors were left looking into the candy store without any way to invest.  So with the democratization of capital and the ability of an untapped investor community to now have a seat at the table, the broker-dealer becomes an all-important intermediary.  In a highly regulated environment, the Broker-dealer takes the onerous task of KYC, ID verification, and AML ( anti-money laundering) off the issuer’s shoulder;  so you, the Issuer, can run your business without worrying about this important compliance requirement. As a result, you not only have the opportunity to gain large groups of investors but also develop brand advocates who share in your story.

 

Escrow Agent 

After the broker-dealer, you need an escrow agent that can hold funds from investors in all 50 states and territories and only charge you one flat fee. 

 

This key intermediary holds the investors’ funds on behalf of the Issuer until the broker-dealer completes the ID, KYC, and AML verification. Once these checks are complete, the escrow agent can release the funds. Until recently, a couple of historical challenges for industry sectors such as cannabis included the inability to get Escrow for their capital raises. Not only is Escrow now available but also at a cost-effective price point and with normalized fees, which is really the way it should have always been.  

 

Credit Cards 

 

Now below 2.9%  allowing both cannabis companies and their shareholders to be fairly treated when investing in the growth of their companies;  bringing jobs to communities and opportunities to those that believe in the company. Being responsible with your credit cards is common sense. Still, the ease of use and points as an added bonus is certainly one of the nice perks and perhaps a big reason for their high usage via crowd participation in private capital raises.

 

If you’re part of the Cannabis ecosystem looking to learn more about how KoreConX can help you on your capital raising journey, please fill out the form here.

Online is Proving Successful for Minority Founders

Minority-owned startups are proving to be incredibly successful in gaining exposure on online platforms, growing their customer base and raising capital. In 2021, funding from crowd raising grew 33.7%, showing the increasing use of online fundraising.

A Lack of Diversity in Traditional Capital 

Online platforms for startup investing are more inclusive than traditional options. They don’t rely as heavily on already established personal relationships and networks between founders and investors. Instead, they provide a level playing field for all types of founders online.

These entrepreneurs can now get the funding to launch or expand their businesses through RegA+ and RegCF. Online startup investing platforms are also transparent, allowing founders to see which startups are doing well and which ones aren’t. This information was often hidden from view by traditional VCs, which could lead to bias. 

The Internet is Improving Equity Crowdfunding for Minorities

In 2020, only 2.6% of VC dollars were invested in minority-founded businesses. However, over $486 million were invested through online startups in 2021 – a significantly higher sum than traditional VC investment. Through regulations like RegA+ and RegCF, investors have the opportunity to invest in promising startups led by underrepresented founders. These online platforms level the playing field, allowing minority founders to receive the support and capital funding they need to succeed.

As more investors engage with these platforms and more promising startups seek funding through regulations, we will see continued growth in minority-founded companies receiving the support they deserve. Overall, online startup investing has the potential to create a more diverse and dynamic VC landscape – one that better reflects the diversity of several markets.

The Future of Online Funding

There are several reasons why online fundraising is such a valuable tool for minority entrepreneurs. In the past, minority entrepreneurs have often been shut out of traditional funding sources. Also, they have often been pigeon-holed into stereotypes by the mainstream media. But with online fundraising, they can bypass the traditional gatekeepers and structural obstacles, speaking directly to potential investors. They can tell their own stories and showcase the unique strengths of their businesses.

As the world becomes more digital, so too does entrepreneurship. This is especially apparent in how online fundraising is helping businesses of all sizes to raise money. It’s also becoming an increasingly important tool for these minority entrepreneurs.

10 Years Later: How the JOBS Act Has Revolutionized Capital Raising

It’s been ten years since the JOBS Act was passed, enabling companies to raise capital in ways never before possible. What started in Washington, the brainchild of David Wield, is now a well-oiled machine that has funded thousands of companies and is constantly evolving. Ten years on, the various JOBS Act regulations have been put to great use, and we are only at the tip of the iceberg.

Looking Back Ten Years

The JOBS Act was passed in 2012 to help small businesses and startups raise capital. The main idea was to make it easier for private companies to raise money from investors, without requiring them to go through the cost-intensive process of going public. The JOBS Act did this by introducing new regulations, such as Reg D, Reg CF, and RegA+ for raising capital from accredited or non-accredited investors.

Before the JOBS Act, companies were limited in raising money. They could only raise money from accredited investors and eventually needed IPO to access such a hefty amount of capital. With recent expansions of regulations like RegA+ and CF, companies can now raise $75 million and $5 million, up from $50 to $1.07 million. On the tenth anniversary of this monumental legislation, we can look back and see how this legislation has impacted businesses and the economy as a whole.

A Monumental Success

The JOBS Act has been a monumental success in helping businesses raise significant capital. The various regulations have allowed companies to raise more money while remaining private and giving them more fundraising options.

One of the most popular regulations is Reg A+, allowing companies to raise up to $75 million from non-accredited investors. This has allowed thousands of companies to raise billions in capital, with an estimated $1.48 billion being raised with Reg A+ in 2021 alone. In addition, the exemption has been upgraded to make it significantly more usable and has seen a surge in businesses utilizing it.

Another popular exemption is Reg CF, which allows businesses to raise up to $5 million from non-accredited investors.

Reg D has also been popular, allowing businesses to raise capital from accredited investors only, and has been a popular option for companies looking to remain private.

Keeping Companies Private

The JOBS Act has many benefits for companies who want to raise capital, but staying private is one of the biggest advantages. Staying private is growing even more attractive to companies, especially considering they can make a secondary market available for shares bought under JOBS Act exemptions.

Plus, by raising capital through these methods, companies can continue to grow and expand without worrying about private equity firms or other investors taking control. This allows the company to maintain its independence and gives management the ability to make long-term decisions without worrying about short-term results.

The JOBS Act has made it easier for companies to stay private by increasing the amount of capital they can raise and reducing the regulatory burden. This has made these regulations a very popular option, evening the playing field and decreasing the reliance on IPOs to raise capital.

Continued Success for the JOBS Act

The JOBS act has been a resounding success in helping businesses raise capital. This is because the JOBS act allows businesses to raise money in new ways. Additionally, the JOBS act opens the market to a wider pool of potential investors, allowing even the everyday person to enjoy the opportunity to invest in a promising company on the ground floor. The success of the JOBS act has been a boon for the economy as well, helping to create jobs and spur innovation.

The JOBS Act has been a great success, benefiting entrepreneurs and investors alike. After ten years and the recent increase in the amount companies can raise, the JOBS Act has continued to be an attractive opportunity for private companies. But there is always room for improvement, some possible developments in the future include:

  • The SEC could raise the offer limit under Regulation CF, which would fill the current gap between Reg CF and Reg A+ Tier II.
  • The SEC could eliminate investment limits for retail investors, allowing people to assess opportunities and risk tolerance without limits.
  • The SEC could make the exemption from the 12(g) Rule permanent, which would remove a burden for many issuers who are not ready to face the rigors of registration.

While these suggestions would improve the JOBS Act, it is ultimately up to the SEC to show true vision by deregulating as per the suggestions above. Only time will tell what the future holds, but it is clear that it has been a success.

Overall, the JOBS Act has been a massive success in helping businesses raise capital and has increased the number of companies with access to capital. It has also helped enterprises stay private and given them more options for fundraising.

The JOBS Act has been in effect for ten years now, and it has completely revolutionized the way companies raise capital. Regulations like CF and RegA+ have made it significantly easier for companies to access capital, and KoreConX has been there every step of the way to help companies navigate these new waters.

Attracting Impact Investors

Founders and executives of startup and early-stage healthcare companies seeking funding historically were limited to appeals to Venture Capital firms, Angels, and bootstrapping – struggling to survive by internal growth alone. In many cases, the founders resort to selling their businesses for values well below their potential. Fortunately, their options have increased due to

1. The Emergence of the Impact Investor

The economic devastation from the coronavirus and its evolving variants is a once-in-a-lifetime event that super-charged the nascent trend of individuals and institutions to invest in ventures intended to improve the quality of life. The dollar value of “impact investing” – experienced “remarkable growth over the past ten years, reaching $2.1 trillion in 2020, according to the International Finance Corporation (IFC).[i] Impact investments are investments made to generate positive, measurable social and environmental impact with a financial return. The bottom line is that impact investors look to help a business or organization complete a project, develop a new life-saving treatment, or do something positive to benefit society.

2. Exposure of Venture Capital Myths

For years, companies seeking funds avoided the tag of “social responsibility,” afraid that investors would avoid any company whose profit objective is compromised by non-financial returns. Nobel Prize-winning economist Milton Friedman ridiculed the idea that business has a “social conscience” and asserted that businessmen who believed such ideas were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” [ii] Consequently, company leaders and investors unwittingly accepted

  • Myth #1 that impact investing produces lower financial returns that take years to materialize. A report by McKinsey & Company in 2018 found that investments in socially beneficial organizations produced returns comparable or exceeding those dedicated to profits only. Furthermore, the median holding period before exit (IPO or M&A) was about the same as conventional VC investments.
  • Myth #2 – An article in the 1998 Harvard Business Review[iii] challenged the belief that VC funding is the underlying force of invention and innovation in economic systems, finding that only a tiny percentage of VC capital (6%) invested in startups or research and development. A VC’s investment focus is on companies that have proven success and need funds for scaling.

Doing Well by Doing Good

Healthcare — where success is measured in improvements in disease progression and quality of life – is the focus of my firm. We promote Impact investing because the strategy provides an avenue in which people can do well by doing good, i.e., buying the securities of companies that positively affect the health of themselves, their families, and others. From the discovery of bacteria to the first artificial organs, significant medical discoveries have extended the quality and length of humans’ lives. Take a look at some of my clients and how they’re positively impacting the world of health and medicine.       

  • EyeMarker: developer of non-invasive assessment and tracking devices for traumatic brain injury (TBI) improving the speed, accuracy, and consistency of concussion detection and diagnosis.  
  • Facible: developer of revolutionary biodiagnostics technology for infectious disease which simplifies the diagnostic testing process while increasing the accuracy of results, empowering patients to better understand their personal health and the quality of products treating their wellness.
  • HealthySole: disrupting the infection prevention market with ultraviolet shoe sanitizer technology clinically proven to kill 99.99% of infections, contaminations, and pathogens in only 8 seconds. 
  • Kurve Therapeutics: provider of compact liquid drug delivery devices significantly enhancing the efficacy and safety of formulations treating Alzheimer’s, Parkinson’s LBD, and ALS. 
  • McGinley Orthopedics: manufacturer of orthopedic surgical devices employing cutting-edge sensing and navigation technology reducing surgical time and cost while improving patient outcomes. 
  • Medical 21: reshaping the future of cardiac bypass surgery with an artificial graft which eliminates the harvesting of blood vessels, significantly decreasing procedure time and cost as well as the risk of infection, scarring, and pain for patients.

The recently updated JOBS Act of 2017[iv] offers founders of healthcare companies an alternative channel for fundraising to running the gauntlet of impersonal VC managers focused solely on extraordinary growth as quickly as possible. Using a Regulation A+ offering in place of venture capital allows company management to target those investors who believe in the company’s objectives and want to support them. For healthcare companies, the potential investors include the

  • doctors who work in the company’s field and know first-hand the impact your solution could have,
  • patients who have been affected and their family members and friends, and
  • people who support the non-profit organizations around those you help diagnose/treat.

Founders of healthcare companies will find a wide variety of investors eager to help them reach their objectives, according to the Global Impact Investing Network 2020 Annual Impact Investor Survey.[v] Their research estimates the current market size at $715 billion, attracting a wide variety of individual and institutional investors:

  • Fund Managers
  • Development finance institutions
  • Diversified financial institutions/banks
  • Private foundations
  • Pension funds and insurance companies
  • Family Offices
  • Individual investors
  • NGOs
  • Religious institutions

Rather than having one or more VC shareholders anxious to make a profit and move on to the next deal, Regulation A+ offers access to thousands of potential advocates – a legitimate community of people with a shared sense of purpose — for your business.

A Reg A+ offering allows investors to contribute to life-saving research, clinical trials, or tools and technology to assist victims in returning to everyday life, possibly within their families. For example, small biotechs are more likely to invest in research, spending up to 60% of their revenue on R&D.[vi] They account for up to 80% of the total pharmaceutical development pipeline in 2018,[vii] making small companies the driving force behind innovative new therapies, and 64% of all new drugs approved by the FDA in 2018 originated from small pharma.

Final Thoughts

Founders seeking new funding should ask, “Do I want a group of shareholders that focus solely on my bottom lines or investors who care about our company’s objectives for the full community – patients as well as shareholders?” The question is especially pertinent since an alternative process is available with less hassle, cost, and time. We believe that Regulation A+ offerings should be in the toolbox of every founder, owner, CFO, and Treasurer in the United States. Their use provides excellent upside potential with little downside risk.

 

Resources:

[i] Gregory, N. and Volk, A. (2020) GROWING IMPACT New Insights into the Practice of Impact Investing. International Finance Corporation. (June 2020) Access through https://www.ifc.org/wps/wcm/connect/8b8a0e92-6a8d-4df5-9db4-c888888b464e/2020-Growing-Impact.pdf?MOD=AJPERES&CVID=naZESt9

[ii] Friedman, M. (1970) A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its ProfitsNew York Times. (September 13, 1970) Accessed through https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html

[iii] Zider, B.(1998) How Venture Capital Works. Harvard Business Review. (November-December, 1998) Access through https://hbr.org/1998/11/how-venture-capital-works

[iv] Littman, N. (2021) Healthcare-Focused Impact Investing: Another Way To Invest For Change. Forbes Magazine. (April 28, 2020) Access through https://www.forbes.com/sites/forbesfinancecouncil/2021/04/28/healthcare-focused-impact-investing-another-way-to-invest-for-change/?sh=3f4c7f501e5c

[v] Staff. (2021) WHAT YOU NEED TO KNOW ABOUT IMPACT INVESTING. Global Impact Investing Network. (August 25, 2021) Access through https://thegiin.org/impact-investing/need-to-know/

[vi] Coskun, M. (2020) How is R&D spending affecting Biotech company growth? Data-Driven Investor. (May 11, 2020) Access through https://www.datadriveninvestor.com/2020/05/11/how-is-rd-spending-affecting-biotech-company-growth/#

[vii] Kurji, N. (2019) The Future of Pharma: The Role Of Biotech Companies. Forbes Magazine. (May 29, 2019) Access through https://www.forbes.com/sites/forbestechcouncil/2019/05/29/the-future-of-pharma-the-role-of-biotech-companies/?sh=43d88c5f6bb3

The Recipe for a Successful RegA+ Offering

If your company is looking to raise funding, you’ve probably considered many options for doing so. Since the SEC introduced the outlines for Regulation A+ in the JOBS Act in 2012 and its subsequent amendments, companies are able to raise amounts up to $75 million during rounds of funding from both accredited and non-accredited investors alike. If you’ve chosen to proceed with a RegA+ offering, you might be familiar with the process, but what do you need for your offering to be a success?

When beginning your offering, your company’s valuation will play a key role in the offering’s success. While it may be tempting to complete your valuation in-house, as it can save your company money in its early stages, seeking a valuation from a third-party firm will ensure its accuracy. Having a proper valuation will allow you to commence your offering without overvaluing what your company is worth, which can be more attractive to investors.

Since the SEC allows RegA+ offerings to be freely advertised, your company will need a realistic marketing budget to spread the word about your fundraising efforts. If no one knows that you’re raising money, how can you actually raise money? Once you’ve established a budget, knowing your target will be the next important step. If your company’s brand already has loyal customers, they are likely the easiest target for your fundraising campaign. Customers that already love your brand will be excited to invest in something that they care about.

After addressing marketing strategies for gaining investments in your company, creating the proper terms for the offering will also be essential. Since one of the main advantages of RegA+ is that it allows companies to raise money from everyday people, having terms that are easy for people to understand without complex knowledge of investments and finance will have a wider appeal. Potential investors can invest in a company with confidence when they can easily understand what they are buying.

For a successful offering, companies should also keep in mind that they need to properly manage their offering. KoreConX makes it simple for companies to keep track of all aspects of their fundraising with its all-in-one platform. Companies can easily manage their capitalization table as securities are sold and equity is awarded to shareholders, and direct integration with a transfer agent allows certificates to be issued electronically. Even after the round, the platform provides both issuers and investors with support and offers a secondary market for securities purchased from private companies.

Knowing your audience, establishing a marketing budget, creating simple terms, and having an accurate valuation will give your RegA+ offering the power to succeed and can help you raise the desired funding for your company. Through the JOBS Act, the SEC gave private companies the incredible power to raise funds from both everyday people and accredited investors, but proper strategies can ensure that the offering meets its potential.

What Franchisees and Franchisors Should Consider when Crowdfunding

With franchisees and franchisors looking to secure capital, a growing trend is using Regulation CF to raise capital from accredited and nonaccredited investors. Since RegCF’s expansion to $5M in early 2021, the updated limit provides even more potential for franchises to raise the money they need to fund operations and expansions. 

 

Here are some things franchisees and franchisors should consider:

 

Anyone Can Invest

 

Regardless of income, anyone can invest in a RegCF offering. This means that both wealthy accredited investors and everyday investors can also become shareholders. With this in mind, the pool of potential investors increases substantially compared to traditional private investments. 

 

Fees and Compliance

 

When conducting a RegCF offering, franchisees and franchisors should be prepared to pay portal fees, potential broker-dealer fees, and legal fees to prepare the offering documents, for example. There will also be a cost to engage with an investor acquisition firm to market the offering to potential investors. 

 

Building the Franchise 

 

While one of the most obvious advantages of a crowdfunding campaign is securing funding to grow, there are other benefits. For example, some investors may become franchisees while others are incentivized to become loyal customers. A successful RegCF campaign can also be useful for brand marketing. 

 

Alternative Financing

 

For some franchisees, getting a traditional bank loan is not possible. Some banks have requirements for how long a franchise has been open when applying, so this option is not feasible for newer franchises. Instead, crowdfunding can provide the necessary funding to open or expand to new locations. 

 

More Favorable Terms

 

Sometimes, offers from private investors like venture capital or private equity firms can be unattractive to franchisors. The investor may request too much control over the company that the owner would not want to give up, making the deal impossible. Instead, crowdfunding allows companies to dictate the deal and retain control over the company. 

The Evolution of Reg A+

During the recent Dare to Dream KoreSummit, David Weild IV, the Father of the JOBS Act, spoke about companies going from public to private, access to capital Reg A+, the future of small businesses raising capital, and the future of the broker-dealer system. The following blog summarizes his keynote address and what Wield believes will be the future of raising capital for small businesses. 

 

Reg A+’s Creation

The JOBS Act, passed in 2012, helped address a significant decrease in America’s IPOs. “When I was vice-chairman of NASDAQ, I was very concerned with some of the market structure changes that went on with our public markets that dropped the bottom out of support for small-cap equities,” said Weild. “80% of all initial public offerings in the United States were sub $50 million in size. And in a very short period of time, we went from 80%, small IPOs to 20%, almost overnight.” The number of operating public companies decreased from about nine thousand to five thousand. The changes in the market significantly restricted smaller companies from growing, unable to go public because of prohibitive costs and other expenses. 

 

Effect on Small Business

After years of lobbying and the passage of the JOBS Act, only one of the seven titles went into effect instantaneously: RegA+. With this new option for raising capital, startups could raise $50 million in money without filing a public offering. The previous maximum was $5 million; this would eventually be increased to $75 million. It also expanded the number of shareholders a company can have before registering publicly, which is essential as companies can raise money from accredited and non-accredited investors through this regulation. RegA+ and the other rules have had a significant impact on the way startups do business. This has been a significant benefit for small businesses, as it has allowed them to raise more money without going through the hassle and expense of becoming a public company. 

 

Reg A+ into the Future

The capital raising process was digitized by taking the investment process and making it direct through crowdfunding, removing economic incentives for small broker-dealers who could not make their desired commission on transactions. This resulted in many of them consolidating out of business and leaving a gap in the private capital market ecosystem that supports corporate finance. Changes to the JOBS Act are beginning to reintroduce incentives for broker-dealers, which will continue to shape the future of private investments as it will continue to facilitate the growth of a secondary market. Wield’s thoughts on the future of capital raising marketing are that the market is not yet corrected, but it is on track. He said: “I would tell you that there’s a great appetite in Washington to do things that are going to improve capital formation.”

 

Getting more players like broker-dealers involved in the RegA+ ecosystem will do nothing but benefit the space. In his closing remarks, Wield said that this would provide for a “greater likelihood that we’re going to fund more earlier stage businesses, which in turn gives us the opportunity to create jobs and upward mobility. Hopefully, since much entrepreneurial activity is focused on social impact companies to solve great challenges of our time, whether it’s in life sciences, and medicine, or climate change, you know, I firmly believe that the solutions for climate change are apt to come from scientists and engineers who’ve cracked the code on cutting emissions or taking CO2 out of the atmosphere. And so from where I said, getting more entrepreneurs funded is going to be important to have a better chance of leaving a respectable environment for the next generation.”

Has RegA+ Killed the IPO?

Has RegA+ Killed the IPO?

 

Regulation A+ gives issuers the ability to raise $75 million in crowdfunding while remaining private. With RegA+ benefiting both companies and investors, does this mean the death of IPOs?

 

RegA+, part of the JOBS Act, allows companies to raise funds through the general public, not just accredited investors. With more and more IPOs delayed, unprecedented access to private capital is available to all organizations. With RegA+, anyone can invest in private companies, making it increasingly popular with companies seeking capital, primarily since they can raise a significant amount of funding.

 

The regulatory and monetary hurdles that come with entering an IPO in addition to RegA+ have led to delays in initial public offerings. Since the JOBS Act was passed in 2012, funding opportunities for private companies have improved, especially with the allowance of not-accredited investors opening up a previously untapped pool of prospective investors. Additionally, the secondary private investment market increases liquidity options, allowing investors to sell shares in private companies to others without waiting for the company to go public.

 

Pre-JOBS Act, many companies were forced to go public because they were limited to a certain number of shareholders. With RegA+, this limit is non-existent, allowing them to stay private longer. In 2011, companies stayed private for about five years on average; in 2020, companies were private for an average of 11 years. 

 

RegA+ brings renewed opportunities, especially to small-cap companies. Companies gain access to liquidity, investors, and significant capital growth that would not have otherwise occurred. RegA+ offers substantial advantages over the traditional IPO. As our KorePartners at Manhattan Street Capital have pointed out:

 

  • “Startups don’t need to spend as much time trying to win over large investors and can focus instead on getting the company ready for the next level. Since Regulation A+ options are still being realized by the people who are now able to tap this investment potential, there is enthusiasm and momentum that is certainly to the advantage of the startups and growth-stage companies.”
  • “Instead of large amounts of capital being raised from a few sources, Reg A+ funding collects smaller amounts from a bigger pool of investors. This means that no single investor will own enough shares to have a controlling stake in what the company does, meaning that the startup can continue to operate as it pleases.”
  • “Word-of-mouth marketing is still considered the most powerful of all promotions, whether it happens in-person or through online means like social media. Main street investors are committing hard-earned money and have more of an incentive to see a return on it. They are more likely to evangelize the brands they have invested in which means a much wider marketing reach than if the company was spreading the word on its own.”
  • “Just as the investors will want to tell other people about the brand, they will also likely want to test out the products or services themselves. This can lead to feedback that improves what the company offers to the public.”

 

These are significant advantages over an IPO that will allow an issuer to secure the capital they need to grow, create jobs, and provide investment opportunities. Especially with everyday investors able to participate, RegA+ does a great job of leveling the playing field and opening opportunities up to those who would have been traditionally excluded from private investment deals.

$1 Billion Raised Through RegCF

It seems 2021 is the year where we continue to break new ground for the JOBS Act, and today marks a momentous milestone in its history. Fundamentally, the act was designed to empower businesses and democratize capital. Not only has it succeeded in this goal, but it has also allowed companies to create jobs and return ownership to company founders. Recently, the amount of capital raised under Regulation CF offerings has reached an amazing milestone: $1 Billion USD over the lifetime of the exemption. 

 

This tremendous achievement would not have been achieved without the great work done by those in this sector. As of June 2020, there were 51 active RegCF funding platforms, a number that continues to grow as we see continued expansion on offering limits from regulators to make this funding method even more powerful. Now, over a year later, and after RegCF offering limits increased to $5M USD, we see nearly 70 regulated crowdfunding portals registered with FINRA.

 

We would not be arriving at this milestone today without the great work our of KorePartners in the industry, many of which have the same mission of creating equal access to the private capital markets for the everyday investor and include:

 

 

And perhaps most importantly, we would like to thank you: the investors who have poured capital into causes and businesses you are passionate about. Without your investments, we would be a long road away from the milestone we celebrate today. You have made the JOBS Act a reality and a phenomenal success that we could not have achieved without you. The everyday investors have been the lifeblood of this industry, fueling innovation, company growth, and job creations with your investments.

 

With more capital poured into private companies through these regulations, there is more opportunity than ever before for companies to succeed and investors to get involved with innovative, industry-changing companies. Such opportunities were previously unavailable to Main Street investors, but the JOBS Act has radically changed this landscape. After the incredible growth over the last nine years since the JOBS Act’s initial passage, it will be exciting to see how the space progresses over the next decade. 

 

Hooray to $1 Billion USD and counting!

 

As we move into the future, this is the group that will advance RegCF to raise $5 Billion USD for private companies:

How Does RegA+ Impact the Life Sciences Industry?

Since dramatic improvements to Regulation A that went into effect in 2015, the exemption has become a tremendous tool allowing private companies to raise significant capital. Unlike other funding methods, RegA+ allows companies to raise capital more efficiently with less hassle at a lower cost. 

 

Companies in diverse industries can benefit from the power exemptions like RegA+ give them to raise unprecedented capital in the private market. Before the JOBS Act, private investments were limited to wealthy, accredited investors, private equity firms, venture capital, and other players. However, when the legislation opened up investment opportunities to retail investors, companies were suddenly able to tap into a new pool of potential investors. In addition to making investment opportunities more accessible, the JOBS Act was also created to create jobs and foster innovation in America. 

 

These factors make RegA+ particularly well-suited for the life sciences industry. Retail investors typically make investments in companies they support and believe in. Life science companies aim to develop innovative treatments for medical conditions, make life easier for those with chronic conditions, and discover new medicines that can dramatically improve a patient’s life. Through RegA+, the ability of the everyday individual to invest in these deals is powerful. People will want to invest in a company developing treatments for conditions that have personally affected their lives or a loved one. 

 

Recent research has found that, in the post-JOBS Act economy, there has been a 219% increase in biotech companies going public in an IPO. Many of these companies are focused on developing treatments for rare conditions and cancers. Funding received through JOBS Act exemptions has significantly reduced the time to IPO after benefiting from raising earlier capital at a lower cost. Not only does this have beneficial economic implications, the advancement and funding of life sciences companies will positively impact humanity itself. Being able to identify treatments to life-threatening conditions can extend lifespans and enhance the quality of life significantly. Instead of certain conditions having terminal diagnoses, patients would have options to recover and treat their illnesses. 

 

However, companies in the life sciences space typically require significant capital to fund research and development, clinical trials, and regulatory approval. Since the increase of RegA+ to a maximum of $75 million in March 2021, even more companies will likely begin to explore this capital raising route. If companies can raise needed capital sooner and easier, they can bring their innovative medical treatments, devices, and medications to market sooner as well. This means that patients would begin to benefit from new, lifesaving options even sooner. 

 

The Role of Investor Acquisition in Capital Raising Activities

The goal of any capital raising activity is to secure capital for the growth and development of the business. Without needed capital, it can often be challenging to expand; whether that means hiring more employees to keep up with demand, improving production facilities to manufacture a product, or funding research and development to bring more products or services to the market. However, in order to actually raise the capital required, potential investors need to be made aware of the offering and the opportunities becoming a shareholder entails. This requires marketing.

 

When it comes to RegA+ and RegCF offerings, the potential to sell securities to the everyday investor is powerful, opening up the market to a vast pool of potential investors not available to private companies before the 2012 JOBS Act. However, this also creates the need for companies to find the best way to reach their target audience and make them aware of the investment opportunity. Through marketing, you are able to inform prospective investors of the opportunity to invest in your company. 

 

More than ever before, social media has become an integral part of marketing activities across all business sectors. It allows you to reach your audience where they’re at, and as nearly seven in ten Americans are on social media, that place is online. Through social media, businesses can tell their story and use that to drive investors (and even new customers) to support their brand. Beyond social media, marketing becomes a key component of investor acquisition. Through investor acquisition, a company is able to target investors based on demographics; whether that is people who exhibit similar behaviors to shareholders, by age, by location, or by any other meaningful factor that allows you to identify the right investor for your company. The methods to target these prospects are just as diverse. While we’ve already mentioned social media, email marketing is still an effective media channel, along with online advertising, and many more channels of marketing. The importance is to use whichever channels allow you to best reach your target audience. 

 

The key to marketing is that it helps publicize your offering and find the best investors for your company. Successfully marketing an offering, as long as advertisements are truthful and not misleading, can make a significant difference in the raise’s success. Similarly, finding the right investor acquisition partner with experience in marketing capital raising activities can help ensure you meet compliance and use the most effective strategies for reaching the right audience. 

What Forms of Alternative Finance are Available?

Starting a business can be difficult. Most young companies enter the scene with little capital to help them grow. Taking a loan out from the bank is a good start, but some options can end in higher rewards without a loan hanging over your head. These are alternative finance options, like raising seed capital from friends and family, angel investors, or crowdfunding. Today, we will explore forms of alternative finance available to you as a private company and where in the life cycle of your business they may appear. 

Friends and Family

In the early stages of your company’s business life cycle, raising capital from family and friends is a great place to start securing safe, additional funding if you are able. When your family and friends are early investors, they are not required to register as such, making it easy for them to help your growing company. In this stage of your company’s development, entrepreneurs will want to retain as much equity as possible. Friends and family investors make this possible without needing to give up part of a growing company. 

As you begin to accelerate your business plans, there are several avenues available that can help you raise significant capital and increase your valuation if (or when) you plan to offer your company later on the public market.

Angel Investors or Venture Capital Firms

As a private company, one of the traditional ways for you to raise capital is through an angel investor, a wealthy individual, or a venture capital firm, a group of investors that invest in companies on behalf of their clients to make them money. Both of these investors will generally invest early, requiring equity and hoping for a successful return on investment later on. 

Peer-to-Peer Lending 

Peer-to-peer lending is a pretty straightforward form of alternative finance. Typically, through online platforms, investors can enter a pool of lenders, which a borrower can pull from and then repay. This form of investment cuts out the bank as the middleman, which opens up access to companies that may not have good credit. 

Crowdfunding

Crowdfunding is a great mechanism for investments that build a company’s proof of concept because crowdfunding success relies on having a product or service people want or believe in. As the name would imply, crowdfunding is sourcing small investments from a large number of investors and falls into one of two categories rewards-based or equity-based offerings. 

Rewards-Based Crowdfunding

Rewards-based crowdfunding is an investment that expects compensation in the form of the product a company is producing. A good platform for this form of crowdfunding is Kickstarter. You will often see independent video game developers or small business owners looking to raise capital for a particular product and offer rewards based on how much an investor invests. 

Equity-Based Crowdfunding or Regulation CF

Regulation CF is a crowdfunding tool regulated by the SEC signed into law in 2012. However, it has recently expanded to allow more investing opportunities. The JOBS Act allows non-accredited investors to invest in private companies in exchange for equity in the company. More specifically, for investors with either a net worth or annual income less than $107,000, investments in Reg CF offerings are limited to $2,200 or 5% of the greater of their annual income or net worth. 

This tool allows companies to raise as much as $5 million in 12 months from many investors. In 2020, 358,000 investors participated in Reg CF campaigns. 

Regulation A+

Another method of allowing companies to have non-accredited investors invest in their companies is Regulation A+, by exempting the offering from SEC registration. Many companies have begun to offer securities through the RegA+ exemption following a successful RegCF raise. Proceeding this way will elevate your chances of raising more money, up to $75 million annually, because the Regulation CF will show potential investors that the products or services offered by the company are of great interest to many individuals. It is important to note that non-accredited investors are limited to investing 10% of their annual income or net worth, whichever is greater.

 

There are many avenues of alternative finance to investigate before going to a traditional financing option as a private company. We encourage you to look into all of these types and see which is right for you and your business. 

 

What is Regulated Crowdfunding

On April 5th of 2012, President Obama signed into law legislation called the JOBS Act. Four years after that act was signed, Title III of the JOBS Act was enacted. This was Regulation CF, which allows for private companies in their early stages to use crowdfunding to raise money from any American, not just accredited investors. This opened the doors with funding portals for companies to trade securities to a larger pool of investors to raise needed growth capital and allow average people to benefit from the possibility of investing in an early-stage company.

When it was first implemented in Spring 2016, Reg CF allowed companies to raise a maximum of $1.07 million within 12 months. Now, with new amendments added to the law by the SEC that went into effect in March 2021, companies can raise a maximum of $5 million. You may be familiar with the idea of crowdfunding with the success of websites like Kickstarter, and this works similarly. Instead of donation tiers that would award you merchandise from the campaign, investing in a private company with Reg CF will give you securities or equity in the companies. Previously, the barrier for entry into this investment type was very high, as you needed a lot of capital to invest in a private company. 

The new amendments still have a limit on how much a particular individual can invest when it comes to non-accredited investors but removed the limits on accredited investors. More specifically, for investors with either a net worth or annual income less than $107,000, investments in Reg CF offerings are limited to $2,200 or 5% of the greater of their annual income or net worth.

Reg CF is typically used for early-stage startups to build capital and has significantly changed the road map for entrepreneurs, allowing them to look to crowdfunding options before venture capital investments. Because the cost and barrier to entry for Regulation CF lower than with Reg A, many companies are using this after their first round of funding to prove the viability of their concepts and build a business. Then after a successful Reg CF, raising up to $5 million, this proves that there is interest in what you are building. In turn, this improves your valuation and allows for a much more successful Reg A campaign that could help you raise even more capital. 

There is a significant benefit to everyone involved in a Reg CF. The companies running the campaign are raising money to prove their viability, fuel the growth, and democratizes capital, allowing everyday Americans to participate in a system that was until recently closed to them. In 2020, 358,000 investors participated in Reg CF campaigns, a significant increase from the 15,000 investors participating in 2019. RegCF is a way for Americans to diversify their investment portfolio. They can grow as an investor by investing in a private company with a much lower entry cost.

With Reg CF garnering much success for both investors and issuers alike, it will be exciting to see how it continues to evolve in the future. We may see even higher raise limits, further expanding access to capital, increasing the number of American jobs, and further democratizing investment opportunities.