Crowdfunding Opens the Flood Gates

The Passing of Reg A+ has enabled Retail Investors to partake in Investment Vehicles once closed off to them.

President Barack Obama signs the Jumpstart Our Business Startups (JOBS) Act, which includes key initiatives the President proposed last fall to help small businesses and startups grow and create jobs, in the Rose Garden of the White House, April 5, 2012. (Official White House Photo by Pete Souza)

On April 5th, 2012, President Barack Obama forever changed the course of the investment landscape by passing a momentous legislature called the “Jumpstart our Business Startups Act”.

Today better known as the JOBS Act, the bill was passed with the ambitious goal of promoting greater entrepreneurship and investment within the states. The bill allows small retail investors to participate in private transactions once only available to certain affluent and accredited investors.

Previous to the JOBS Act, one must have met certain arduous and stringent qualifications before partaking in any private investment. These requirements as enforced by the SEC, Securities and Exchange Commission, included the following:

• Have made over $200,000 in annual salary for the past two years

• Or have made over $300,000 in joint annual salary (for spouses) over the past two years

• Or have over $1M in net worth, excluding their primary residence

  
  

But these limitations were fortunately lifted at the welcoming of the JOBS Act. Embedded in the densely written legislature is its first and most prominent law known as Regulation A+ or better known to date as Reg. A.

Reg. A is the body of law that dictates that both affluent and non-accredited investors can invest in private transactions so long as certain protections are met. After a series of obstacles through state legislatures, Reg. A was finally passed by Congress on June 19, 2015.

The business community has since applauded and profoundly benefited from the Reg. A while some still remain ambivalent to its many benefits. Reg. A is broken up into 2 Tiers but for the sake of this article we will focus our attention specifically on Tier II.

Tier II allows eligible American and Canadian companies to offer and sell equity of up to $50 million. Non-accredited investors can invest so long as the amount they contribute does not exceed more than 10% of their annual income/ net worth (depending on whichever is greater) in that given fiscal year.

Another major significance of Tier II is its pre-emption of the Blue Sky Laws. Under this body of law, corporations are not required to painstakingly register their offerings in each state where they wish to sell their securities.

This comes as a clear advantage for startups and small businesses that don’t share the operational prowess and same resources as some of their larger constitutes. Apart from the rise in startups and small businesses, it’s also interesting to note the number of money managers that have arisen in the markets due to Reg. A.

One popular individual that has widely benefited from Reg. A is no other than social media darling and real estate guru, Grant Cardone. Since the introduction of Reg. A, Cardone’s personal net worth (~$300M) and assets under management (~1.2B) have grown exponentially.

Leveraging both his large social media following and popularity, Cardone is able to raise a significant amount of capital for his vast portfolio holdings.

Armed with a vast array of loyal followers from all walks of life (white and blue collared), Cardone operates a rather unique strategy. He first purchases large residential properties with 70 or more units that are positively cash flowing and located within landlord friendly Southern states.

After purchase, he liquidates a large percentage of shares by selling equity to his followers through announcements on his social media platforms. He then rolls over his capital to purchase other assets while also taking a 1% acquisition, 1% management and a 1% disposition fee from his investors.

The introduction of Reg. A has opened doors to a vast amount of funding once before not available to the investment community. This has spurred massive fundraising on platforms such as KickStarter, GoFundMe and Indiegogo. But the latest frenzy has been in the increase of platforms for investment managers.

Some examples of these platforms include Republic, SeedInvest and FlashFunders. With such great promise, experts believe the industry is only set to grow and prosper and potentially reach close to $11 billion in transaction value by 2022.