The US government announced they are adopting temporary rules that make it easier and faster for startups to launch small equity crowdfunding raises.
The 3 key features are:
1. Only startups that have done crowdfunding raises in the past can take advantage of these new rules.
2. Startups can begin their raises without releasing financials.
3. Startups are not allowed to transfer raised funds to their bank account until they release their financials.
How does this work in practice?
The startup has to convince an investment platform or portal to host its raise. It has to decide how much it’s raising. There are two options:
1. Companies raising less than $250,000 will have to issue self-audited financials before the raise ends. That is more than the $107,000 previously permitted.
2. Startups raising up to (the maximum amount allowed) $1.07 million can submit audited financials before the raise ends. These startups can begin their raises and start accepting commitments to invest before they submit their financials.
These new rules provide an excellent opportunity to go bargain hunting for high-quality startups. Valuations should drop significantly as the economy is struggling. Startups won’t want high valuations to stand in the way of investors writing them checks. Investors will be able to invest at discount prices. With more startups raising, there will be more great opportunities than usual. It’s a great time to invest in seed companies but only if you do your homework.
If you usually do not invest in companies that are desperate for cash, consider that these are unusual times. Founders can’t be blamed for not preparing for the unpredictable. COVID-19 arrived with no warning. If these founders now need fresh money to keep their startups going, it could be a nice win-win for both, the company and the investor.
Check for the best startups selling at a discount now. When these new rules end, some excellent opportunities might not be available anymore.
Sven Franssen