By now, there is little doubt that South Florida’s swift ascendancy in the technology ecosystem is emblematic of a permanent change to our local business economy. Perhaps the most recent sign of confidence in the region’s tech boom came earlier this month when Silicon Valley Bank, a staple banker to growing technology companies, announced that it would open a Miami office in Brickell. According to Silicon Valley Bank, the firm banks nearly half of all venture-backed companies in the United States.
The change to our business community may have broader implications for local enterprises, whether or not they are startups or operate within the technology sector. With venture capital financing experiencing historic growth – Crunchbase reported that a record breaking $288 billion was invested worldwide by venture capital firms during the first half of 2021 – businesses should be aware of financing strategies most commonly used by startups and growing firms.
Most businesses raise capital through equity or debt offerings: selling stock or taking loans. Historically, these methods were complex and challenging for small businesses. These traditional options, such as bank loans or the sale of stock to accredited investors, have been supplemented by creative options designed to make the process easier and more flexible. These newer options may make capital more accessible for some businesses.
One such option is equity crowdfunding. This relatively new option emerged in 2016 with the implementation of Regulation CF, part of the 2012 JOBS Act. Equity crowdfunding has grown at a rapid pace in the past few years.
Traditionally, regulations permitted companies to sell stock only to individuals meeting certain net worth or income levels. Regulation CF allows eligible companies to sell stock to people who do not meet these requirements, provided the stock is sold through an approved third-party platform and the company complies with the other applicable rules of Regulation CF and other legal requirements. Investors purchase the stock directly through the third-party platform.
While this may be an attractive option for businesses looking to raise money through a broad sale of stock, those businesses should consult with a securities attorney who can ensure compliance with the complex regulatory framework. There are numerous regulations with which businesses must comply to take advantage of equity crowdfunding in the United States.
SAFEs (Simple Agreements for Future Equity) are another option which have become popular with early-stage ventures. SAFEs bridge the gap between equity and debt. The investor provides funding to the company and, in exchange, the company is contractually obligated to provide the investor with a certain amount of equity upon satisfaction of a future condition. Typically, these conditions include a future equity financing round, the sale of the company, or an initial public offering. Unlike loans, these agreements do not usually have maturity dates. As with any other financing transaction, an experienced securities attorney should be retained to assist with any SAFE.
These options supplement, but have not replaced, traditional bank financing and securities offerings. Most investments made by venture capital firms still take the form of traditional stock sales. Nevertheless, as the South Florida market continues to flourish, we can expect to see a wider variety of deals.
Jared A. Stark is Managing Partner of Stark Weber PLLC and chairs the firm’s Business Assistance practice areas.This article is intended to convey general information and does not constitute legal advice or any attorney-client relationship. You should retain an attorney before engaging in any transaction.