Fundraising in the private markets has become increasingly challenging in 2023 as the venture capital (VC) world tightens amidst economic uncertainty. However, companies are still finding creative ways to continue raising capital.
Many are turning to Regulation A (Reg A) and Regulation Crowdfunding (Reg CF), both of which provide unique benefits and flexibility compared with traditional VC.
The Slowdown of Traditional VC Fundraising
Many are concerned about a potential recession with high inflation and rising interest rates. This is why venture capital firms are slowing investments in new ventures and instead focusing on their existing portfolios.
The decision to slow investments leaves many startups and mature private companies struggling to raise new capital through traditional, accredited VC channels.
The Increasing Appeal of Reg A and CF Offerings
To continue fundraising despite the VC pullback, companies are getting creative and increasingly turning to Reg A and Reg CF offerings.
“Regulation A raises are particularly attractive to companies for their lower costs and streamlined process compared to traditional IPOs or amount of equity that a VC might require. These offerings allow more flexibility in marketing and enable access to both accredited and non-accredited investors,” said Etan Butler, chairman of Reg A platform Dalmore Group.
Reg A allows companies to raise up to $75 million in a 12-month period from public investors with simpler reporting requirements compared to a traditional IPO. The shares are also freely tradable, giving founders and investors potential liquidity.
Democratizing Startup Fundraising
Reg CF enables companies to raise funds in a 12-month period up to $5 million. The funds can come from both accredited and non-accredited investors. While lower than Reg A, Reg CF provides startups and small businesses access to capital from their customers and supporters.
The Reg CF and Reg A alternatives help democratize fundraising, especially for female and minority founders.
“There are 30 million companies in the U.S. and many of them have capital needs to
survive and expand. Very few of them are aware that you could raise money from anyone using a Reg A offering, and that it is as simple as putting an ‘invest’ button on your website,” Butler remarked.
Recent Reg A Policy Changes
Recent changes have made Reg A even more appealing as an alternative to traditional fundraising channels.
Reg A has truly become a valid alternative to an S-1 once it gets to a certain size. Reg A offerings are often referred to as “mini IPOs” because they allow companies to raise money from the public without the same level of regulatory and financial reporting requirements as a traditional Initial Public Offering (IPO) using an S-1 registration statement.
In 2021, the SEC increased the maximum raise allowed under Reg A from $50 million to $75 million. This expanded fundraising capacity and lowered costs and reporting requirements, making Reg A a viable option beyond early-stage companies.
According to Mike Van Someren, Real Estate and Corporate Partner at AmundsenDavvis, “This means a greater pool of investors without all of the costs of a traditional IPO or without the need to have a predetermined list of investors.”
Providing Founder Liquidity
Reg A allows companies to sell a portion of their equity ownership in the company to investors. Selling secondary shares can give founders significant liquidity without requiring the company to go public or be acquired. This offers early stakeholders a way to realize returns on their investment.
Reg CF, on the other hand, doesn’t allow for a secondary market, so investors cannot sell their shares until the occurrence of a liquidity event.
Navigating the New Fundraising Landscape
For companies looking to raise capital in 2023’s tightening markets, navigating the pros and cons of different fundraising options is crucial.
Every company and its financial situation is unique, so investors, founders, and funders need to consider factors such as:
● Current stage of growth
● Future expansion plans
● Target
TGT
investors
● Founder liquidity needs
● Desired degree of control and governance
Reg A certainly allows for larger raises than Reg CF, but it also involves more time and legal costs for registration and reporting. For earlier-stage ventures, the lower costs and
quicker process of Reg CF may make more sense despite the smaller raise limits.
When navigating the fundraising landscape, companies should be flexible and open-minded. They shouldn’t default to traditional VC simply out of habit since Reg A and CF and other creative options are gaining momentum for good reason.
Founders today have more choices than ever, each with unique advantages. Assessing all available options is crucial to determine the best path based on company fundraising needs and long-term vision.
Despite the uncertain economic environment, creativity and diligence when evaluating fundraising options can help secure the growth capital needed to drive company success.
The Future of Fundraising Is Flexible and Creative
While VC funding has declined, innovation and options like Reg A and CF empower companies to continue raising growth capital. The regulatory flexibility and marketing possibilities attract everything from startups to more mature companies looking for liquidity and access to public markets.
Reg A and CF are leveling the playing field and providing control without relying on VC funding. By prioritizing flexibility and creativity, companies can still fundraise effectively going forward.
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