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Sunday, Dec 10, 2023

Will Crowds Form to Fund Firms?

We are now experiencing historical momentum where technology, after disrupting just about every part of our human and social lives, is finally impacting the venture financing industry – with important implications for Los Angeles.

Regulations are catching up since the final rules of the Jumpstart Our Business Startups Act, often referred to as Regulation A+, were adopted by the Securities and Exchange Commission this summer.

Under the new regulations, companies can do what’s been labeled as a “mini-IPO.” They can raise up to $50 million annually from both accredited and nonaccredited investors – a game-changing move that made some industry insiders declare Reg A+ one of the greatest steps forward for small-business capital formation in a generation.

I would like to believe that eventually all entrepreneurs will have a capacity to sell shares in their ventures to customers as well as followers and fans. The entrepreneurial community, however, has been rather cautious to try this new treatment that apparently has arrived with a few side-effects.

To date, there are less than 30 Reg A+ filings. I believe the reason for such a low response to what was supposed to be a revolutionary provision is that companies realize that accessing capital via Reg A+ means a transition into the publicly traded domain, which in turn means they face an extremely complex web of SEC-imposed regulations and rules.

And who wants to go public? The data show that the growth of the IPO market has been rather unsteady. In 2005, we had 192 IPOs; in 2010, 154; last year welcomed 275 new publicly traded companies and so far this year we’ve added 152.

IPO flow

There are many reasons why IPOs are generally out of favor, including the high cost of reporting, notorious scrutiny from regulators and high level of disclosure. Plus, there is plenty of cheap private capital these days, the abundance of which has created monsters adoringly called “unicorns” by VCs that as of now include 141 startups and counting.

Another thing to remember is that while “testing the waters” – a new procedure that allows a company to promote its potential offering via public domains (including social media) – companies can collect unbinding pledges from potential investors.

This means you’re not permitted to accept money from potential investors, and all your communications are subject to anti-fraud laws. And since you are asking for hypothetical commitments, a total sum of the stated interest might be an inflated number and the actual money that the company will be able to raise once it files might be lower.

While it is clear that new regulations are still only a small step toward the democratization of capital we all have been craving, the good news is that Los Angeles is now perfectly positioned to become a financial tech capital and take the national lead with fully operational platforms such as StartEngine, Realty Mogul, Crowdfunder – and more to come.

I’ve had the chance to talk about it to the founder of NextGen Crowdfunding, Aubrey Chernick, a successful L.A. tech entrepreneur who is also known for his philanthropic efforts.

Aubrey observed: “Los Angeles is becoming the nexus of equity crowdfunding – a new trend that will make the funding of startups and emerging businesses accessible to the everyday investor.” 

Stay tuned, Angelenos.

Victoria Silchenko, Ph.D., is founder of Metropole Capital Group in Century City and creator of the Alternative Funding Forum, which will be held in the Century Plaza Hotel on Nov. 6.

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