The SEC and FINRA recently issued proposed rules for implementing the new crowdfunding exemption under Title III of the JOBS Act. The proposed rules are now open to public comment and it likely will be several months before the SEC and FINRA adopt final rules. In the meantime, entrepreneurs and crowdfunding platforms continue to wait and contemplate the viability of the new law to meet the capital needs of small businesses.
The good news for those who either need money now or are unsure of using a new and untested method for raising capital is that there is another option. We often extol the virtues of a direct public offering (“DPO”) as a tool that allows businesses and nonprofits to legally raise investment capital from both accredited and non-accredited investors. In the last two years our clients and we legally raised over two million dollars using this method of investment crowdfunding that for decades has benefited companies like Ben & Jerry’s, Annie’s Homegrown, and Real Goods. Increasingly, more and more entrepreneurs are choosing to use this well-established but underutilized financing option as shown in this New York Times article that features our work.
The newly effective Rule 506(c) under Regulation D presents another option for capital seekers; Rule 506(c) lifts the ban on general solicitation for businesses selling securities to accredited investors. However, many businesses, even with the ability to advertise publicly, cannot find interested accredited investors.
Not only is a DPO an effective way for businesses to raise capital from investors of all means, but a DPO also presents a unique opportunity for businesses to gain a competitive time advantage over their fellow entrepreneurs (and possibly competitors) who plan to launch investment crowdfunding campaigns when the new JOBS Act crowdfunding exemption finally becomes legal.
Here are just a few advantages of using a DPO to conduct an investment crowdfunding campaign now:
- Time is of the essence. Business needs and/or opportunities are usually time sensitive; entrepreneurs may not have the luxury of waiting months for a new and untested method for raising capital to become legal. If you have immediate capital needs, a DPO is potentially a great option now.
- Investor demand for alternative types of securities is strong. Considering the types of investment opportunities that are presently available to non-accredited investors (i.e. the public stock market, deposit accounts, money market accounts, real estate, etc.) it is not surprising that many investors are eager to invest in alternative types of securities that can possibly produce favorable returns and also support a values-aligned enterprise at the same time. Once the floodgates of JOBS Act offerings opens, investor demand may wane with the influx of many new investment options; assuming of course that the new crowdfunding exemption is a useable option.
- Beat the Market. When the new crowdfunding exemption finally becomes legal, there could be legions of entrepreneurs lined up and waiting to offer and sell investments in their companies. Don’t be a needle in a haystack. Get in front of the growing market and distinguish your company and your offering by conducting an investment crowdfunding campaign now using a Direct Public Offering!
Nate Hyun is the director of crowdfunding and securities compliance at Cutting Edge Capital, a consulting company that advises social enterprises on capital raising. He is also a corporate and securities attorney focused on helping small businesses and startups gain better access to capital. You can contact Nate by email at firstname.lastname@example.org or follow him on Twitter @nthyun.
For information on the latest investment crowdfunding campaigns go to CuttingEdgeX.