Among the most promising and accessible financial opportunities open to new investors are Regulation A+ offerings. They are revitalizing the investment landscape by opening the door to new investors. They are bringing the democratic power of crowdfunding into equity.
What is Regulation A+ and Why Is It Suited to the Cannabis Sector?
As explained by SeedInvest Technology, Regulation A+ invites everybody to invest in private companies. Startups can use a “mini” initial public offering under Reg A+ to offer their customers the chance to become investors.
This new tool came into being with a bi-partisan law called the Jumpstart Our Business Startups (JOBS) Act. In this law is a provision expanding entrepreneurs’ access to capital, allowing them to go to online, publicly announce their capital fundraising initiatives, and invite participation from the crowd.
Before this, private companies could not engage in crowdfunding except from accredited investors — a pool of just the wealthiest 2% of our population. In 2015, three years after the enactment of the JOBS Act, the Securities and Exchange Commission (SEC) adopted its final rules to enable small businesses’ access to capital. Title IV (Regulation A+) became effective, permitting private businesses to fundraise up to $50 million from members of the public.
What Can a Reg A+ Offering Do for a New Business and Prospective Investors?
A Reg A+ offering has a number of powerful aspects. It can:
- Attract customers to stake a financial claim in a business;
- Reward early adopters for their contribution to the early growth of the business;
- Engage a whole network to propel the business to viability and success;
- Empower companies to tap into an engaged source of capital that still allows the entrepreneur plenty of leeway to steer a startup;
- Turn supporters into a supportive community whose enthusiasm and interest boosts and continually contributes to marketing.
In this way, Reg A+ makes it possible for dedicated entrepreneurs to raise capital, follow the vision they started with, and market the business — all at once. And as small contributions come from many investors, the ownership of the business can be spread out.
Companies that raise capital through equity crowdfunding must first file with the SEC and await approval. The fees related to Reg A+ offerings are lower than those associated with a traditional initial public offering, and the disclosure requirements are less stringent over time.
Equity Crowdfund Jumpstarts Access to Capital
Cannabis-focused startups may depend on creative funding ideas because of restricted access to traditional lending institutions.
While the landscape is now changing, marijuana has historically been an outsider where banks or any federal institutions are concerned. This is precisely why groups such as ATMA Technology have emerged. Tech companies are finding ways to offer lending institutions the confidence to become involved in the lucrative cannabis industry, by offering support with the due diligence and compliance work.
Because the U.S. cannabis industry has become legalized state by state, banks — which are federally insured — have understandably hesitated to work with legal startups in this sector. This has perpetuated a sort of stigma, and the aura of secrecy that attends the financing of cannabis companies. And yet, legal companies must depend on financial services to pay bills and taxes, manage employees’ salaries, and run their accounts openly and efficiently.
A lot of this is timing. The legal cannabis sector is still in its infancy, and many banks have yet to allocate the resources to the creation of services for an emerging class of businesses.
For their part, startups stand to reap substantial rewards for getting into the sector early rather than hanging back and waiting for traditional lending sources to catch up to them. Hence the intense interest in Regulation A+ in the cannabis space.
What This All Means for You
The cannabis industry is an emerging opportunity. Legalization is spreading. Medicinal marijuana is legal in nearly every U.S. state; and about a fifth of the states have established legal markets for adult-use marijuana. In 2018, Canada is poised to legalize cannabis for adult use nationwide — expanding opportunities further.
Accordingly, investors looking for areas of expected growth are taking a serious look at cannabis. They may also consider an expanding variety of businesses that surround and support the cannabis sector. A good number of them are very well positioned for financial success, from growers or “plant-touching” companies to electrical and tech support to compliance software. The Reg A+ vetting and ongoing compliance rules work to support the most viable among them, assisting the investor community and the public.
Additionally, the equity crowdfunding platforms themselves, which we’ll talk about below, offer excellent sources of information. They are geared to make sure new investors can back cannabis-related and other early-stage businesses that they can understand and support. They want their clients to have a firm grasp on how crowdfunding works for the individual investor.
Finding Equity Crowdfund Investment Opportunities
If you’re curious to learn more about Reg A+ and equity crowdfunding as an entrance into cannabis investments, there are several online platforms that offer information and well-designed entry portals.
CrowdfundX, StartEngine, and SeedInvest
CrowdfundX serves as the marketing agency for True Leaf Medicine International Ltd., which recently closed its initial Regulation A+ offering after raising $10M (CAD) in a Reg A+/public equity hybrid. True Leaf thereby become the first Canadian-listed Reg A+ success.
In addition to CrowdfundX, you might wish to browse the current startups at SeedInvest. It offers investment opportunities in the cannabis sector from time to time. Startups are only actively listed while fundraising, so the list of new companies is dynamic. SeedInvest allows users to invest in some startups for as low as $200. It also has a handy feature called Auto Invest that enables easy diversification by directing the investor’s funds into 25 different startups.
And keep a watch on StartEngine. It too offers cannabis-focused opportunities now and then. It facilitates both Reg A+ investments and the lower-cap Regulation Crowdfunding. Run pursuant to another provision of the JOBS Act, Title III, Regulation Crowdfunding offers entrepreneurs the ability to raise as much as $1,070,000 each year. Regulation Crowdfunding is also called Reg CF or “true crowdfunding.”
Read more about how Reg A+ and Regulation Crowdfunding differ.
Fundanna was the first Regulation Crowdfunding portal dedicated exclusively to cannabis and related businesses in the United States. Fundanna accepts investments from as low as $100. And it is free for the investors.
Its founders note that cannabis-derived products have important uses in medicine, materials, fuel, food, and cosmetics. Fundanna is committed to the industry’s success.
Because Fundanna is entirely dedicated to the cannabis sector, visitors to its website will find plenty of companies open to investments. At any given time, Fundanna will have investment opportunities in cannabis-related technology, real estate, growing, dispensaries, medicinal products, and more.
Limits to How Much Investors Can Put Into an Equity Crowdfund
The Securities and Exchange Commission has set a limit on how much you can invest per year in Regulation Crowdfunding. It calculates the limitation based on an investor’s net worth and yearly income.
An investor with either a net worth or a yearly income below $107,000 can, in a given year, invest up to $2,200 or 5% of the lesser of your net worth or your income.
The limit goes up for investors who have both annual earnings and a net worth of at least $107,000. These investors may annually invest up to 10% of the lesser of net worth or income. But no one may invest more than $107,000 a year.
These numbers will be adjusted for inflation every five years.
In Reg A+, there are two tiers. Tier 1, in which a startup raises up to $20 million, does not have an investment limit. Tier 2, in which the startup raises up to $50 million and which preempts state blue laws, permits non-accredited investors to spend up to 10% of their income or net worth in a given year.
Because these amounts are subject to adjustment, check the current limits before investing.
Since the enactment of the JOBS Act, small companies can raise up to $50 million under Regulation A+ and about $1 million through Regulation Crowdfunding. And now, the 98% of the U.S. population formerly kept out of investing in startups is invited to participate.
We believe this is aligned with the concept of economic opportunity in all walks of life.
An investment through crowdfunding casts a vote for a dedicated entrepreneur. It just might also cast a vote for economic fairness.
Note: This article provides a general overview of growth opportunities in cannabis securities and related information. It constitutes neither legal advice nor financial planning advice. As with all capital investments, cannabis-related investments warrant careful examination based on a range of expert information prior to investment. Shares in companies working in a changing regulatory environment have special inherent risks as well as growth potential.