Crowdfunding website Flash Funders of Santa Monica is hoping for a big boost Jan. 29.
That’s the day the Securities and Exchange Commission’s Title III rulings, also known as Regulation CF, go into effect, opening equity crowdfunding to tens of millions of unaccredited adult investors in the United States.
While it’s currently legal for companies to sell up to $50 million worth of equity to uncredited investors using the SEC’s Regulation A+ rules, which went into effect last year, Flash Funders Chief Executive Vincent Bradley said the Regulation A+ route isn’t practical for early stage businesses.
The legal due diligence required for Regulation A+ costs hundreds of thousands of dollars, according to Bradley, which is cost prohibitive for small startups. That means the only other crowdfunding option for early stage startups is to raise money from accredited investors.
“Previously, when you were trying to raise capital online, you were restricted to marketing to the 8.5 million accredited investors in the United States, which is very difficult,” he said. “Regulation CF will allow early stage businesses to target 120 million-plus unaccredited Americans. That’s a big deal.”
Still, Regulation CF will come with restrictions. Under the SEC’s rules, companies will only be able to raise $1 million from unaccredited investors over a 12-month period. Individual investors with incomes less than $100,000 will be limited to investing $2,000 or 5 percent of their annual income, whichever is greater. And the aggregate amount of securities sold to an unaccredited investor through all crowdfunding offerings may not exceed $100,000.
Still, Bradley sees equity crowdfunding as a boon for early stage startups and imagines unaccredited investors will invest with the same enthusiasm they have shown while giving money on donation-based crowdfunding websites such as New York’s Kickstarter and San Francisco’s Indiegogo Inc. If they do, Bradley foresees the new crowdfunding rules upending early stage financing entirely.
“Capital formation is really going to change in 2016,” said Bradley. “This is the biggest year in private markets in 80 years – since the crash of ’29.”
Cloud services company J2 Global Inc. of Hollywood gobbled up four more firms in the fourth quarter of last year, bringing the total number of companies it acquired in 2015 to 24.
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