As SEC Mulls Equity Crowdfunding, CA Entrepreneurs Test Other Options

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making a formal securities offering by asking investors to register their interest.

After going through that pre-testing process with StartEngine’s help, Phoenix, AZ-based startup automaker Elio Motors has asked for SEC approval to raise $32 million, Miller says. A large majority of the investors interested in the offering are people with ordinary incomes, he says. Elio would use the capital to build prototypes of a high-mileage car that it hopes to sell for about $6,800, Miller says.

“With Regulation A+, companies can convert customers into investors, who then become brand ambassadors,” Miller says. “A company can engage the social media networks of their investors.”

StartEngine doesn’t charge clients during their “testing the waters” phase, but bills them $50 for every investor who actually buys the securities. Each company selling shares sets its own minimum investment, Miller says.

Under Tier 2 of Regulation A+, non-accredited investors can put up no more than 5 percent of their annual income or of their net worth if either of these fall below $100,000. Wealthier investors can invest more, up to a maximum of $100,000. Under Tier 1, non-accredited investors are not subject to a limit.

FlashFunders’ Bradley says the Regulation A+ options may work well for larger companies that have gained some traction, but they still aren’t of much use to smaller companies with limited cash to spend. In Bradley’s view, both Regulation A+ options involve substantial expenses—either state-by-state registration in Tier 1, or detailed financial reporting in Tier 2.

“Either way, it doesn’t make sense for a startup,” Bradley says. FlashFunders doesn’t make use of the new Regulation A+ rules, he says.

Propel(x), which focuses on seed stage funding, nevertheless sees Regulation A+ as a future option for its portfolio companies as they reach the pre-IPO stage, said regulatory affairs staffer Shirley Li in a company blogpost.

The opposition

Not everyone has welcomed all the changes flowing from the JOBS Act. The North American Securities Administrators Association (NASAA), which represents state securities regulators, has warned that small investors could be more vulnerable to fraud and investing losses under the new rules. The regulators’ group has been leery of allowing widespread advertising of securities offerings by young private companies, when their responsibility for financial reporting is still less than that of public companies. NASAA has also objected to regulations that free some companies from state review of their securities offerings.

NASAA points out that states have joined together to streamline their pre-approval procedures by creating a coordinated review process for securities offerings.

The top securities regulator for Massachusetts, William Galvin, has asked a federal court in Washington, DC, to block Regulation A+ from taking effect, arguing that it undermines state oversight of private company securities. In a series of letters, Galvin argued that the states and the SEC are already grappling with fraud complaints stemming from fundraising under the Regulation D 506 rules, which are also exempted from state review.

Unanswered questions

A number of questions about protections for ordinary investors remain unanswered—both under the changes already made by the SEC, and under the full equity crowdfunding regulations still to come from the agency.

One of those questions was raised by FlashFunders’ Bradley, even though he’s an equity crowdfunding advocate.

The JOBS Act places caps on the amounts that ordinary folks can invest in a company raising money through equity crowdfunding. People with either an annual income or net worth of less than $100,000 can put up 5 percent of their annual income or net worth per year. Those with an annual income or net worth of $100,000 or more can invest 10 percent of their annual income or net worth per year, up to a total of no more than $100,000.

Bradley says he approves of the caps placed on non-accredited investors, which will shield them from losing all their savings if they’ve backed a company that fails.

“People will be able to do some damage, but they’re not going to destroy their lives,” Bradley says.

But Bradley says he wonders who will … Next Page »

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Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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