In what could prove to be a big development in the democratization of capital investing, the SEC on Tuesday released final rules that will finally allow the general public to invest in private companies. CraftFund is founded on the premise that customers and community members should be able to invest in companies they know and love. We believe there is pent up consumer demand for ownership in favorite brands and have been working hard to find mechanisms to make this possible. We're hopeful Tuesday's development is a big piece to the puzzle of turning customers into owners and advocates!
Ever since the Great Depression the general public has generally been precluded from investing in small private businesses. Instead the chance to invest in a local business or growing consumer brand has been open (by and large) only to accredited investors--those making $200,000 a year or with $1M net worth. This was set to change in 2012 with the passage of the JOBS Act, which includes several capital formation provisions. The most talked about provision (Title III) will allow startups and small businesses to raise up to $1M from the general public through online crowdfunding portals. Title III still has not been enacted by the SEC. The SEC did enact a provision that makes it easier to solicit investments online from accredited investors (Title II). On Tuesday the commission released a final rule for Title IV that contemplates something between Title III and a full blown IPO.
Title IV Details
Title IV amends a rarely used exemption called Regulation A. Under the new rule companies will be allowed to advertise and raise up to $50M from the general public (accredited and non accredited investors). Companies will have a choice between two "tiers." Tier 1 allows a company to raise up to $20M with less stringent filing and reporting requirements. However, a company would face state "Blue Sky" filing requirements. Tier 2 permits a company to raise between $20-50M from the general public without having to navigate state Blue Sky hurdles. However the filing and reporting requirements are more onerous, including audited financial statements.
How it will be used: Mini IPO
The regulatory and filing expenses will likely be cost prohibitive for most startups. Until the SEC passes a workable Title III rule, startups and early stage companies seeking to turn customers into owners will likely make use of the growing number of state crowdfunding laws like the one CraftFund helped pioneer in Wisconsin. However, the new Reg A rule will likely be attractive to more mature small businesses seeking growth capital. We believe this has potential for regional craft brewers to create a mini IPO experience for their customers similar to what BrewDog has done in the UK through "Equity for Punks."
The new Reg A rule will likely go into effect in June. We are making preparations to help brewers, real estate developers and other place makers create an IPO experience for their customers and community members. Give us a shout if interested!