With the presidential election consuming many people’s thoughts for the past few weeks, much of the news got crowded out. One example is a new ruling from the Securities and Exchange Commission (SEC). The agency voted to approve – by a margin of three to two – important rules for the equity crowdfunding industry.
The SEC amended the private placement provisions of the Securities Act of 1933. These were set in place during the Great Depression in order to help protect individual investors from fraudulent and deceptive fundings. But with the emergence of the internet and the growth in startup investing, the rules have become outmoded. There has also been a patchwork of complex requirements that have often made it difficult for companies to raise capital.
So what did the SEC change? Well, the new rules cover various areas, and they will certainly have a major impact on the equity crowdfunding industry.
Let’s take a look.
Covid-19 Relief for Equity Crowdfunding
Earlier in the year, the SEC relaxed some of the paperwork requirements for equity crowdfunding deals. And for the most part, this has worked out quite well. Note that there has been a surge in activity.
But the SEC has expanded this relief until Aug. 28, 2022. In other words, this should help keep up the momentum for the industry and provide for a smoother transition.
Regulation A/A+ and D
The SEC has increased the funding limits for Regulation A and A+ offerings from $50 million to $75 million and the secondary sales by $15 million to $22.5 million. As for Regulation D offerings for Rule 504, the limits on the amounts will go from $5 million to $10 million. There were also exemptions from the rules prohibiting general solicitation for “Demo Days” and other investor events.
True, these changes may not necessarily have much impact on the crowdfunding market. Regulation A/A+ and D offerings are usually for major institutional fundings. Yet the rule changes will still be important for smaller companies to get future financing.
Regulation Crowdfunding (Reg CF)
Regulation Crowdfunding, or Reg CF, is a type of option for companies to use for a capital raise. The SEC has changed the rules to make this option much more attractive for companies to use. Instead of a limit for raising $1.07 million during a 12-month period, the limit has been increased to $5 million.
There will also be no investor limits for accredited investors. These are persons with annual incomes of $200,000 (or $300,000 for joint filers), or those with a net worth over $1 million (this excludes the primary resident). The SEC has also relaxed the restrictions for non-accredited investors. The bottom line: Most people will be able to participate.
The SEC rules also allow for “testing the waters” of crowdfunding equity offerings. This will be a big help as companies will be able to get a sense of the overall interest for the investment. There may also be the benefit of creating more exposure for the startup.
“I believe that the new rule changes will have a snowball effect,” says Brian Belley, founder of Crowdwise.org and VentureWallet. “Having not only a higher quantity, but also a higher quality of issuers on the platforms means that more investors who are seeking returns outside of the public markets will also flock to equity crowdfunding for diversification. And each time a new startup uses crowdfunding, they are engaging their existing audience and often introducing hundreds, if not thousands, of new investors to equity crowdfunding who previously had no knowledge of it. So as more investors commit more capital and Reg CF becomes a more legitimate source of raising early-stage capital, more startups will hear about it and try it out, and the cycle will continue to feed on itself.”
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.
