One area of Title III of the JOBS Act that was rather vague was the ability of a company to offer securities through an offer relying on Regulation D at the same time as a crowdfunding offer. The statute was ambiguous on the matter, with provisions that were contradictory. The SEC cleared up the ambiguity and made a clear declaration that, under the proposed rule, "[a]n issuer could complete an offering made in reliance on Section 4(a)(6) that occurs simultaneously with ... another exempt offering."
Of all the provisions of the proposed rule, this one may have the most impact on early-stage companies. This provision will allow companies to continue to focus efforts on raising capital from angel, and institutional investors, while at the same time being able to offer a stake in the company to the friends, family, and early supporters that helped make the company possible. Such a raise can engender goodwill and provide early validation of the company.
Capital intensive, high-growth potential companies will likely find that Section 4(a)(6) (crowdfunding) is not an ideal solution to all of their fundraising needs. The $1 million limitation on the amount raised from investors over a 12-month period might be too restrictive, and their finances may be too variable for an accountant (required for most raises) to provide much value. In the end, the safe harbor provided by Rule 506 of Regulation D, with its unlimited raise potential and flexibility with respect to disclosure requirements, remains the best way to raise funds from outside investors (if the company can get investors, that is).
However, Rule 506 is a terrible way to allow friends and family to invest in a company. For non-accredited investors to participate in a raise under Rule 506, the issuer must provide those investors with an offering prospectus that is on par with the prospectus required to be filed with the SEC to conduct a registered offering of securities — a very costly and time consuming effort.
Instead of producing a prospectus, under the proposed rules, companies can instead reach out to friends and family through an offering through a securities crowdfunding platform with a Section 4(a)(6) offer. The type of disclosure required is not a heavy lift, relative to a full prospectus, and would likely already be produced to conduct the Rule 506 raise. Additionally, if the crowdfunding raise is below $100,000, the company can avoid the CPA review or audit requirement that applies to larger Section 4(a)(6) offers.
Companies undertaking this type of side-by-side offer would only be able to do so via a registered broker-dealer as the proposed funding portals would be prohibited from conducting an offer under Rule 506. Additionally, there are securities laws concerns that would require the assistance of experienced counsel (e.g., the way to structure a deal so as to comply with two sets of regualtions).
With only proposed rules, it is too early to determine the exact methods by which companies will take advantage of securities crowdfunding. Nevertheless, it is easy to see how, when done properly, a securities crowdfunding raise could provide significant benefits to early-stage companies looking to raise capital and grow.