Small Capital Formation Edges Up Slowly but Steadily

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By Rob Tricchinelli

Nov. 3 — Small startups are slowly but steadily making use of new Securities and Exchange Commission rules allowing them to raise capital without registering their securities.

One-hundred and fourteen offerings have been made under the agency’s crowdfunding rules, which were adopted in October 2015 and went live in mid-May, Keith Higgins, director of the SEC’s Division of Corporation Finance, said Nov. 2 at a Practising Law Institute conference in New York.

Under 1933 Securities Act Regulation A Plus, which allows sales of unregistered securities up to $50 million, there have been more than 130 offerings since the rule took effect in June 2015, Higgins said. The data were through Sept. 30.

The numbers represent a modest bump over previous data, reflecting growing pains as a new set of securities registration exemptions take effect and skepticism by some lawyers that those pathways to raise capital are appropriate for small startups.

Crowdfunding

The 114 crowdfunding offerings have sought to raise more than $13 million, an average of roughly $115,000 apiece.

There have been a dozen completed offerings, Higgins said, eclipsing $5 million for an average of more than $400,000.

“That’s actually a little bit larger than I might’ve expected,” Higgins said.

Regulation Crowdfunding allows early-stage startups to raise money in small dollar amounts from a wider variety of qualified investors than previous regulations permitted.

An issuer may raise up to $1 million a year in a crowdfunded offering, but investors with less than $100,000 of annual income may invest no more than 5 percent of it.

Several lawyers at the conference told Bloomberg BNA that the crowdfunding rules are restrictive and are unlikely to flourish beyond current levels.

Reg A Plus

Reg A Plus breaks qualified offerings into two tiers. The first tier includes offerings up to $20 million per year, and Tier 2 includes those up to $50 million. State laws are preempted under the larger tier.

The number of offerings has been split almost evenly between the two tiers, Higgins said—65 for Tier 1, and more than 70 for Tier 2—but the dollar values are heavily weighted in the larger tier.

The SEC has qualified 76 of those offerings, meaning it has declared them eligible to begin raising money, and 14 offerings have been completed.

More than $170 million has been raised, the bulk of it under Tier 2. Higgins called it “a fair amount of money for startup capital.”

To contact the reporter on this story: Rob Tricchinelli in New York at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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