One could easily say the fundraising rules and regulations in place for small businesses until recently have placed insurmountable burdens on companies trying to raise money.
Two converging trends, both gaining momentum, have collectively and powerfully changed the capacity for small businesses to raise capital:
For every idea and every company, no matter how unusual, there are a sizable number of investors who will want to invest in it.
–Michael Bissonnette
Over the last number of years three game changing events have opened up enormous new avenues and opportunities that entrepreneurs can use to raise money—offering the option of reaching out to a new category of investors totaling over 30 million virgin investors.
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To facilitate investments in small businesses, the Securities and Exchange Commission (SEC) adopted Regulation D (Reg D), also commonly referred to as a private placement, which allowed companies a “safe harbor” to bypass the costly and time-intensive requirement to register and seek approval* with the SEC before being able to sell stock to investors.
TWO HUGE ADVANTAGES TO COMPANIES ARE:
No Broker Dealers or Investment Bankers Required
Before Reg D companies had to use third party intermediators (investment bankers and broker dealers) to work through the morass of SEC regulations and registration requirements to sell the offering. The Reg D exemption breaks this stranglehold and allows companies to sell their own offering directly to investors. This has eliminated commissions, fees, loads and third party sales charges of any kind.No SEC Review or Approval Process—Raise Money Quickly
Before the Reg D exemption, stock offerings required SEC approval*. This process took many months and cost tens of thousands of dollars in legal, accounting and audit fees.Companies can now create their own Private Placement Memorandum (PPM) without audited financials or extensive legal fees. Their PPM requires no review, comments, or evaluation by regulators. Companies often choose to write their own PPM with the help of a PPM template and file themselves, and some choose to use an attorney for a simple review or to write their complete document.
The net result is that companies can now be on the street selling to investors in a few weeks. (Some of our clients have received their first investor checks in less than 30 days.)
*A Reg D is the quickest pathway to have funds come in the door. *A Reg D is the quickest pathway to have funds come in the door.
LIMITATIONS TO REG D:
Companies Cannot Advertise Their Offering
As significant as this milestone was, companies using a private placement are still unable to advertise or sell their offering to the general public. They are limited to selling their offering to individuals with whom they have a pre-existing relationship. This means entrepreneurs can only sell to a limited universe of family, friends and professional relationships, such as angel investors, lawyers, accountants, consultants, suppliers, customers, employees, etc.Requirements For High Net Worth Investors
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Exemptions: SCOR, Rule 147, and Regulation A
Congress, realizing small businesses created the vast majority of new jobs and recognizing the need for legislation that makes it easier for small businesses to raise money, passed the Small Business Investment Act (SBIA). This instructed the SEC to give small private companies, for the first time in history, the ability to raise money from the public markets.
With the SEC leading the way, they worked in concert with state regulators, to stimulate more investments in small companies. Three special small business exemptions were passed: the SCOR Act (Small Corporation Offering Registration), Rule 147, and Regulation A. These three new regulations clearly and decisively gave small businesses full and equal access to the public markets in the same way that Broker Dealers and Investment Bankers had for taking larger companies public, without the same level of legal filings or accounting regulations.
Now, small business are allowed to legally advertise and sell stock directly to the general public, either in their home state (SCOR & Rule 147) or nation wide with a Reg A offering.
Net worth and accredited investor requirements are eliminated.
To further open up investment opportunities for both small companies and investors alike, the SEC also eliminated the net-worth requirements and the need for accredited investors for companies that raised money using Direct Public Offerings. This offered significant benefits to both companies raising money and investors as well.
Now virtually all interested investors will have both access to private companies one-on- one presentations and group road shows, plus the right to invest in companies of their choice doing Direct Public Offerings.
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Never in the history of fundraising have entrepreneurs had the capacity to reach out and tell their story to a nationwide pool of investors.
When the SEC accepted the internet as a medium for advertising offerings, distributing investor prospectuses, and delivering investment documents, they dramatically decreased the cost to find, pitch and close investors.
In addition many other solid proven direct marketing methods have proven to work consistently over the years including direct mail, postcard mailings, newspaper ads and many other methods.
Note: Before the arrival of the internet and the SEC’s acceptance of the internet as a marketing and communication channel for investors, all marketing outreach efforts to investors had to be by mail and accompanied by a prospectus. To reach out to 5000 investors to invite them to an investor meeting would have cost in excess of $20,000 compared to a few hundred dollars for a similar marketing campaign today using targeted e-mail for affinity investors with a web link to the company prospectus.