|Posted on March 6, 2019 at 3:30 PM|
Startups and fast-growing businesses are increasingly turning to Crowdfunding exemptions to raise capital in Seed Rounds and Pre-Seed Rounds. They are relying on JOBS Act exemptions from SEC registration, primarily Regulation D, to make equity and debt offerings to accredited investors and non-accredited investors. And they are quickly learning how to use other exemptions created by the JOBS Act, especially Regulation S and Registration A.
➢ Q: What is a Pre-seed Round?
A: This is when the issuer and other founders if any are getting the company’s operations off the ground. This is time for a Friends-and-Family Round. No debt. Almost all the investors in early stage companies demand and receive part ownership. It is too early for promissory notes, except for some well-secured real estate deals, unless the investor insists on preferred convertible notes. Valuation is the rub. Valuation is seldom transparent. It is subjective, based on management, track record, market size, competition, risk and any number of things.
➢ Q: What is a Seed Round? A: Sometimes called the Early-Stage Round, this is when issuers hire a founding team to do market research, ancillary product development and market testing. This is also when the issuer decides what the final product or service is going to be and what the ideal demographic is going to be.
➢ Q: Who are Seed Round investors?
A: Seed Round capital sources include angel investors, private equity investors, and alternative class investors. Some issuers return to friends, family and associates at this stage.
➢ Q: What are the Crowdfunding exemptions?
A: Regulation D, using either or both Rule 506(c and Rule 506(b], is the most popular exemption.
Regulation S, for offerings to non-U.S. citizens, is becoming more popular as issuers discover some advantages over Regulation D, such as little regulatory oversight (especially in Malta and other favored offshore jurisdictions), no maximum raise, and no PPM (private placement memorandum) required.
Regulation A has two versions, one with a $20 million max, and the other a $50 million max. Regulation A is the exemption most similar to full registration with the SEC; therefore, compared to the other exemptions, particularly Regulation S, it is prohibitively expensive and time-intensive.
Practice Tip: Well-advised issuers are increasingly using separate Regulation D and Regulation S websites, one for domestic marketing and one for foreign marketing, offering the same assets.
➢ Q: What is the difference between 506(c and 506(b?
A: Rule 506(c allows an issuer to market to the public; Rule 506(b does not. Rule 506(b allows up to 35 non-accredited investors; Rule 506(c does not. The usual drill is to use 506(b to raise money from friends, family and associates. After all capital requirements have not been met, the issuer converts the 506(b offering into a 506(c offering.
History Factoid: To market securities to strangers, as now allowed under Rule 506(c, was illegal for over 8 decades. Today, issuers using Rule 506(c can do practically anything to go after both accredited or non-accredited investors; for instance last year a REIT used 506(c to raise capital from early-stage investors on Craigslist.
➢ Q: So why do any issuers use 506(b?
A: Issuers continue to use Rule 506(b because it allows up to 35 non-accredited investors. If you need family money and some members of the family are not accredited, you must use 506(b.
Practice Tip: An issuer can go from 506(b to 506(c but not from 506(c to 506(b.
➢ Q: What are Series A, B and C Rounds?
A: These rounds are for issuers with track records who have established a user base, have consistent revenue figures or enjoy other proofs of process. Most Series A Rounds raise between $15 million to $50 million. Series B and Series C Rounds usually raise more capital than that, sometimes much more. These rounds are when series 7 and other securities licensees take interest and when VCs and PE (private equity) funds do much of their investing.
Sometimes a single large investor will serve as the “anchor” (think COSTCO as the first tenant in a shopping center), drawing in other, more risk-adverse investors, in exchange for re-negotiated terms.
Most issuers never need Series A funding, let alone Series B or C funding. Their Pre-Seed and Seed Rounds have raised enough capital to enable them to avoid giving more equity.
Private Placement Advisors LLC designs and executes Pre-Seed and Seed Rounds using Crowdfunding (JOBS Act) exemptions. This is all we do. Schedule a free 20-minute consultation. We will listen to the company’s narrative, we will ask questions, and we will suggest one or more JOBS Act solutions. For specific suggestions on how Private Placement Advisors LLC may be able to help your company raise Seed and Pre-Seed capital, email [email protected]