Capital, Crowdfunding, and CannabisRecent changes in crowdfunding investment rules, namely regulation CF and A+ offerings, open promising opportunities and are creating quite the stir in the legal cannabis market.
Prior to 2015, small private companies were not allowed to use crowdfunding dollars except through the top 2% of the wealthiest population, those considered accredited investors, in the United States. This stipulation severely limited the investment pool for many small businesses and startups. This expansion to the Jumpstart Our Business Startups (JOBS) Act, enabled access to investment capital, allowing entrepreneurs in any industry to raise up to a million dollars per year from the general public, thus, lifting the restrictions on who can invest and create a massive investment pool for small business.
Difference Between Reg A+ and Reg CF
New policies give smaller investors the opportunity to invest in a small business without needing millions in assets or a six-figure income. While Title II requires accredited investors with at least a million dollars in net worth, both Title III (Reg CF) and Title IV (Reg A+) of the JOBS act help entrepreneurs raise capital from less wealthy investors. This change makes investment opportunities available to all Americans regardless of the size of their portfolio. The differences are based in investor limits, amount being raised, and disclosure and filing requirements.
Regulation CF, or Title III, rules were not specifically designed with the cannabis sector investments in mind, but they do open access to new investment dollars for many cannabis-centric startups. Incorporated companies doing business in the United States or Canada can now raise up to $1,070,000 through crowdfunding portals.
The new SEC rules also allow individuals and non-accredited investors to make investments in Regulation Crowdfunding, but it limits how much they can give based on their annual income and overall net worth. With at least a $107,000 annual income, potential investors can invest up to 10% of their net worth or income. Additionally, smaller investors making less than $107,000 can invest up to 5% of their annual income or $2,200. No investor may invest more than $107,000 in a single year.
Also known as Title IV, Reg A+ allows private businesses to raise up to $50 million from accredited investors, as well as, non-accredited investors. Similar to a traditional IPO, but Reg A+ allows for faster, and less expensive, capital funding. To qualify, incorporated, US or Canada-based companies must be seeking a minimum of $2,000,000. Title IV requires qualification with the SEC, increased accounting and legal costs, as well as, ongoing disclosure requirements.
The Reg A+ designation provides two tiers for raising capital. Tier 1 allows the company to raise up to $20 million, without investment limits, from accredited investors. Tier 2, on the other hand, allows up to $50 million in fundraising, permits non-accredited investors, and preempts state blue laws.
Advice for Cannabis Start-Ups
CannabisTech reached out to Mathew Peranick, industry expert, for any advice he suggests to cannabis startups considering an equity raise through a crowdfunding platform. Comparing the cannabis industry to cryptocurrency, Peranick believes building the initial investor community is critical to making cannabis investments successful. “Cannabis is another ‘thing’ like cryptocurrencies that is still a little against the grain, so people who are pro-cannabis will fall in love with your business and be more emotionally influenced to invest,” he stated in an email.
Peranick pointed out that funding platforms already have large investor audiences, StartEngine, for example, has more than 140,000 experienced investors to leverage. By using an established network, canna-businesses don’t need to recreate the wheel with their own website.
“Finally, when getting down to the numbers, expect to budget 10-15% of the total amount you want to raise in advertising and marketing costs. If you want to be on the lower end of the advertising budget, you need to get creative in boosting the average investment,” Peranick reminded. “Also, be diligent with media buys and make sure you are getting your investment opportunity in front of the right audience,” he continued.
Multiple Platforms for Businesses and Investors
Entrepreneurs starting a business or investors seeking a cannabis business to invest in should know several crowdfunding platforms already exist.
Fundanna - the first Reg CF funding portal to be approved and regulated by FINRA which is dedicated to the cannabis industry
Cannafundr – low minimum investments of $2500
420FundMe – networking, crowdfunding, and launch parties, 420FundMe helps with all aspects of equity capital.
The cannabis industry is expected to exceed $24 billion by 2025, which means there’s unlimited opportunity to strike it rich during the green rush. This is an amazing point in time to step into an industry still in its infancy. Additionally, the cannabis industry will employ more than 300,000 people by 2020. Not only can an investment help someone chase their dreams to build a business, but it can also help to bring more jobs and a better economy to the entire country.