What is it?
Historically, investing in startups is hard. So hard, it can feel pretty much impossible. The Securities and Exchange Commission (SEC) would only allow investment in startups from accredited investors or people who personally knew the owners of the startup. Accredited investors are people with a net worth of over $1 million excluding their home, joint annual income of $300K, or individual annual income of $200K. That comes out to just over 8% of the U.S. population. The idea was that people with more money would be better at investing in alternative investments. In 2015, the SEC realized that wasn’t true and introduced Regulation A offerings.
By filing for Regulation A with the SEC, private companies essentially are able to raise public dollars while still remaining private. It’s not the wild west though. The company still has to get permission from the SEC to have a Reg A offering. Non-accredited investors are allowed to put up to 10% of their annual income into any one Reg A offering.
Who uses it?
Reg A offerings are filed by startups. Traditionally, startups raise money from venture capitalists or angel investors. Reg A offers everyday people the opportunity to take the place of venture capitalists and get in early on growing startups. There are two tiers of Reg A offerings. Tier 1 allows a company to raise up to $20 million in a year while tier 2 allows up to $75 million.
How do you invest in it?
Since it’s not a traditional IPO, the shares you’re buying into aren’t listed on an exchange like the New York Stock Exchange or the Nasdaq. Instead, shares are typically bought directly from the company through their website or via an intermediary such as Republic, SeedInvest, or StartEngine.
Reg A is a great tool to increase access to investment in early-stage companies. It allows everyday people to play the role of venture capitalist. Equity crowdfunding has come a long way since the days of Kickstarter. Now, instead of t-shirts or early product releases, individuals who make an initial investment in a startup can receive equity.