General Solicitation Is Legal
1 change in the legislation that took effect last September has been shown to be a blessing for many ecommerce companies. On September 23, 2013 the SEC raised the ban on general solicitation. The new Rule 506 (c) of Regulation D of the Securities Act allows public solicitation by start-ups, existing companies, private equity funds, and venture capital funds for private placement fundraising. Solicitations can only be directed to accredited investors unlike equity crowdfunding. The SEC defines an accredited investor as an individual with an income in excess of $200,000 annually, or a couple with a joint income of $300,000 in each of the past two decades, or an individual having a net worth exceeding $1 million, either individually or jointly with a partner.
Ecommerce Companies Flock to Online Portals
Crowdnetic, a technology provider in the crowdfunding industry, gathered information from several online platform intermediaries on PIPRs (Private Issuers Publicly Raising) from September 23, 2013 through February 28, 2014. At the first 120 days (through January 23, 2014), ecommerce businesses raised the most funds — $6.1 million — nearly two times as much as the next largest industry (publishing). From February 28, ecommerce was overtaken by property development, which took in roughly $17 million.
Crowdnetic reports that over 100 ecommerce technology or trade sites chose general solicitation, which means the funds raised per company were relatively modest. As there isn’t any time limitation on soliciting funds, a few of the businesses might still be raising capital.
Currently a variety of SEC registered broker/dealers have sites that let companies searching for investors post a request. The broker/dealer then stores the proposal around to several accredited investors who have recorded with them but this happens behind the scenes. The companies never know who’s looking at the proposal unless a possible investor expresses interest and contacts the company. Most broker/dealers aren’t supplying public solicitation opportunities.
Several intermediary portals which aren’t broker/dealers also exist. These were initially supposed to adapt equity crowdfunding but as time passed with no execution, theses sites changed their version to become portals for accredited investors. They also shop a proposal around to undisclosed potential investors. Many require registration to see details of a raise.
In contrast, a public increase enables everyone to see the details and that has spent. Lots of the companies raising funds in this way have done a conventional seed financing or VC round.
1 intermediary, AngelList, has been the most proactive in helping companies to publicly solicit financing. Here are a couple of examples.
- NetPlenish is an ecommerce technology tool supplier that’s seeking $1 million via a PIPR for its new item, Shop Genius. NetPlenish provides price comparison tools in any site, eliminating the need to leave a shopping website to discover prices. NetPlenish has $800,000 in obligations.
Shop Genius by NetPlenish
- Cratejoy is a hosting platform supplier for merchants looking to launch subscription trade businesses. Cratejoy has raised roughly eighty percent of its $1.3 million target.
- N.I.C.E. Collective, which sells pragmatic menswear online, is in the process of raising $2 million.
- BringMeThat is an internet food delivery platform for small and medium-sized cities which has increased nearly half of its $400,000 goal.
Benefits of Raising Funds Publicly through an Online Intermediary
Raising funds publicly via an intermediary portal is much more efficient and less time consuming than making presentations individually to a single venture capital or angel investment company after another until one decides to invest. The company seeking the cash prepares one demonstration which may be viewed by multiple prospective investors.
Raising funds publicly gives the company a great deal of free exposure to potential investors, clients, and the media. General solicitation gives companies which aren’t in”sexy” technology classes an chance to reach investors who may not otherwise find them.
Which Approach to Take?
If you would like to pursue equity investment, you might be asking yourself if you should you wait for non-accredited investor crowdfunding or pursue public solicitation equity increase. The solution is dependent upon your company and the amount of money you need.
Crowdfunding by non-accredited investors will most likely begin happening by the end of 2014 and lots of the intermediary portals which are doing accredited investor equity crowdfunding will also give the chance for non-accredited investment. If you choose to select the non-accredited investor approach, you can’t increase more than $1 million annually. If your business isn’t something that’s appealing to accredited investors or you don’t need more than $1 million, crowdfunding could be a better choice. Non-accredited investors may see value in businesses that licensed investors would pass over.
The fees are usually higher for licensed investment and reporting requirements more strict. If you choose the 506 (c) 3 course, you’ll be required to show that every investor meets the accredited investor threshold. The portals also have a percentage of the money raised but that will be true of crowdfunding too.
Ecommerce businesses are willing to pursue new financing choices and investors have shown an interest in financing them. If you can’t get a loan or favor equity investors, possibly the overall solicitation alternative or equity crowdfunding may be a fantastic alternative.
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