New SEC Proposals for Crowdfunding pose an important improvement for both businesses and investors
Updated: Mar 13, 2020
Have you heard the great news yet?
Well, there’s going to be an exciting new chapter for REG CF as the Securities and Exchange Commission (SEC) finally announces some long-awaited new changes to be implemented in the upcoming months.
Earlier this month, the SEC came up with some proposals that would improve upon the crowdfunding experience for both the issuers and investors.
What has come before...
There is no denying that since its inception in 2015, crowdfunding has helped many businesses to raise money and non-accredited investors to participate in funding ideas that resonate with them.
However, some business owners and investors have found certain rules and requirements imposed by the SEC to be quite limiting. The low cap on fundraising has also turned some businesses off. That is by improving the regulatory framework we can help even more businesses to get funded bigger amounts.
What’s to come?
On March 4, the SEC proposed to allow startups to increase how much money they can raise via CF from $1 million to $5 million.
It also raises the maximum amount an individual investor could contribute to crowdfunded deals.
Currently, the amount is set to whichever is lower: either 10% of their net worth or annual income. The new plan switches this to which is the higher of the two.
In addition, the new rules will permit to bundle all investors in one entity (SPV) and that entity would appear as one single security holder in the company raising money.
What’s in it for businesses…
Well, by removing the restrictive policies and increasing the limit to $5M, more companies will be encouraged to take the Reg CF route.
Another welcome development is that accredited investors can now invest in Reg CF offerings. Taking the limit off accredited investors will also make Reg CF a reliable alternative to Reg D 506(c). So that’s more potential money for business.
The possibility to have only one investor in their cap table could also be a big factor in taking this route, especially when the company is planning to bring VC late in the game and prefers not not to have thousands of small investors on the cap table. Technically, this is done by putting all the investors into an SPV (special purpose vehicle) and that SPV would become the investor.
What’s in it for CF Investors…
Of course, these welcome developments for the businesses translate to more opportunities for investors.
There will be better deals to be presented to the investors. Mostly because the new rules will make this exemption more attractive for companies with more traction, with more robust management and process in place.
Being able to invest more, based on the "greater of" their income or net worth rule, is also a huge plus for budding investors who want to pour more investment to the companies they support.
Room for improvement?
Yes, there is. I think it would be even better if the rules would allow some confidentiality for the companies looking to raise the money. At this point, the only solution is that the company should not disclose their magic sauce. It would be a lot more useful if it would be some kind of tiered disclosure in which people that will sign an NDA will be able to look at that “magic sauce.”
Of course, during the public comment period, we will try to bring attention to this potential change. Who knows, we might get lucky.
If you have suggestions of your own about REG CF, feel free to send them over to me so I can carry them further to the SEC.