In April of 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Congress’s intent was to make it easier for small businesses to raise money by easing regulatory burdens on raising capital. As part of the JOBS Act, the Securities and Exchange Commission was required to revise Regulation A (Reg A), a historically seldom used securities exemption, and institute Regulation Crowdfunding (Reg CF), an exemption to allow non-accredited investors to make investments in private emerging companies. Reg CF went live on May 16th of this year and has recently celebrated its five month anniversary. With that, we thought it was time for an update on how “the crowd” has responded to the regulation.
In its first thirty days, Reg CF got off to a promising start with forty companies raising a total of about $2 million. Although the total amount of money raised was not large by Uber’s standards, the number of offerings was more than double the amount of Reg A offerings made between 2009 and 2012. Since the first month, however, only ten more companies have filed a Reg CF offering, leading to the question – where is the crowd?
Although it has been just five months, many critics of Reg CF are blaming its lackluster performance on its $1 million funding cap, including Congressman Patrick McHenry, who introduced The Fix Crowdfunding Act earlier this year. To circumvent this issue, while retaining the ability to raise money online, some companies have chosen to utilize the revitalized version of Reg A, rather than Reg CF.
By way of example, you may recall our last crowdfunding article referencing 8tracks, the online music provider that received over $33 million of indicated investment interest from over 35,000 supporters while “testing the waters” earlier this year. 8tracks chose to raise capital through Title II of Reg A, rather than Reg CF, in order to take advantage of Title II’s $50 million funding cap. While Title II also permits companies to raise capital over the Internet, offerings under this exemption come with more restrictions, including limiting “the crowd” to accredited investors. While it is unclear whether the accredited investor requirement was an impediment to raising capital under Title II of Reg A, 8tracks was only able to raise $2 million from about 4,000 supporters in its Series A financing round, likely leaving CEO David Porter asking himself, “where is the crowd?”
Overall, five months is not enough time to ascertain how successful Reg CF or the new Reg A will be in the long term. We’ve heard that despite their limitations, some entrepreneurs are intrigued with equity crowdfunding’s less discussed benefits. These benefits include allowing founders to focus more time growing their company rather than being out pitching investors (which is the traditional way to raise capital) and the fact that crowdfunding may level the playing field for female entrepreneurs raising capital.
While both the Reg A and Reg CF exemptions have their pros and cons, venture capitalists and angel investors will undoubtedly continue to play a large role in early stage investments – at least while we wait for “the crowd” to show up.