When a start-up needs capital to get off the ground, it seeks out "angel investors."
If the start-up grows up to become a successful, fast-growing business, when it needs expansion capital, it can go public.
But some companies need capital when they're in between these two phases – and this is where you come in:
If a company is truly on a path to IPO, investing in it at this inflection point can lead to attractive returns – with less risk than a typical start-up investment.
Companies at this stage are called "Pre-IPO" investments…
And thanks to the SEC’s landmark decision last week to overturn an outdated law, in just 61 days, you'll finally be able to invest in these opportunities.
The outdated law I’m referring to is called the “Securities Act of 1933.”
This law aimed to protect investors in the aftermath of the stock market crash of 1929, and during the Great Depression that followed.
Its intentions may have been good, but the law hindered the growth of early-stage companies, and it denied 97% of Americans – most likely including you – investment access to “private equity,” the most profitable asset class in history.
To explain it briefly, the Act stipulates that when a company offers securities to potential investors, it either needs to register the securities with the SEC so the company can go public, or it needs to rely on a registration exemption.
For a young company without resources, registering to go public would create a substantial burden:
Currently, the SEC estimates that going public costs an average of $2.5 million, and the ongoing costs, even for a small firm, run about $1.5 million annually.
Clearly, this is not a viable option for small companies.
So how about relying on an exemption?
Well, one such exemption is called “Regulation A.”
With Reg A, there are severe limits in terms of how much capital a company can raise, and it can only sell its securities to wealthy “accredited” investors.
The overall regulatory burden for Reg A is so high that it’s rarely used.
In fact, in the year 2011, just one company in the whole country relied on it.
A+ for Effort
But last week, on March 25, 2015, the SEC took a huge step:
It voted to adopt rules on what’s called “Reg A+.”
This action is part of its “to-do” list related to The JOBS ACT, the historic set of new laws meant to encourage investment into small U.S. businesses.
Simply put, Reg A+ will lessen the regulatory burden for pre-IPO companies seeking to raise capital – and it will allow these companies to raise capital not just from “accredited” investors, but from everyday Americans like you.
Although the final rules are far from perfect, there’s no question:
Investing in private equity just took one step closer to being truly democratized.
These rules will become effective in June – that’s just 61 days from now.
We’ll be providing you with more details about Reg A+ offerings over the coming months, but here’s what you need to know right now:
Open to All – Pre-IPO companies can advertise that they’re raising capital, and anyone can invest. Even if you’re not “accredited” (at least $200,000 in salary, or $1 million in net worth), you can invest in any number of companies: for each one, you can invest up to 10% of your annual income or net worth.
Lighter Reporting – Companies will need to provide the SEC (and in certain cases, state regulators) with various documents including audited financials. But overall reporting requirement are lighter than a typical public offering.
Potential Liquidity – Reg A+ securities are freely transferable. That means you can buy shares, and if you choose to, you can sell them to others. This might pave the way for creation of a secondary market, just like there’s a stock exchange for secondary trading of public-market shares.
What Types of Companies Will Use Reg A+?
Although the reporting requirements for Reg A+ are lighter compared to a public offering, they’re still substantial.
Because of this, Reg A+ will be best suited for a certain type of company – namely, “pre-IPO” companies that can attract investors like you, as well as investors from their existing customer base.
For example, a company like Uber, where drivers or riders might be interested in investing…
Or WeWork, the shared “co-working” space, where tenants might like to invest…
Or Airbnb, where both renters and guests might see the benefit in owning shares.
And Here Comes Title III…
Starting in June, with Reg A+, you’ll finally be able to invest in “pre-IPO” companies…
That’s late-stage private equity.
Soon, however, you’ll be able to invest in early-stage private equity, where the companies raising capital are smaller and younger – and the financial returns can be even more dramatic.
You see, the SEC is working to open up access to early-stage private equity, too.
That’s also part of The JOBS Act – it’s something called “Title III.”
Title III is on the legislative agenda for later this year: October 2015.
So keep reading Crowdability. Soon we’ll start sharing private equity investment opportunities that everyone can invest in.