Alright, I'll be the first to admit the title of this article is a little click-baity. The changes are not confirmed yet, but with the explosion of the equity crowdfunding industry well and truly underway, I think the SEC will move forward to confirm most of these changes in the next year or so. If you'd like a tl;dr, basically the SEC is making a series of improvements to equity crowdfunding that will make it easier to follow the rules and–most importantly–raise more money in each offering. This means less expense for founders and issuers because the ritual of having to get audited financials, compliance reviews, etc can now be done only once per $5M raised for Reg CF offerings, as opposed to the current situation which requires all the hoops for every $1.07M. Let's get into the specifics.
The commission proposes raising the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
This one alone is jaw-dropping. I think I heard a collective sigh of relief from the trees that will be saved by the reduction in the amount of legal and fiduciary paperwork that is currently involved in raising over $1,070,000. The nice round number is a welcome change too. Who the hell thought $1,070,000 was the right number to land on anyways? This change will also have a huge cost-saving effect for issuers. Coming from a company that raised two consecutive capped-out offerings via RegCF, you'll be surprised at how fast the legal and fiduciary fees stack up as your offering amount increases. More investors = more paperwork.
The commission proposes removing the investment limit on accredited investors and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.
Both of these changes are great. The former will allow issuers to attract more money from high net-worth investors with the Reg CF vehicle (typically a hallmark of the more expensive and regulated Reg A or Reg D offering types). The latter will allow for a more diverse investor landscape to also invest up to a limit that makes more sense than the current calculation. The end result of these two changes will be a higher demand of shares from issuers, reduced escrow and clearance fees, and fewer cap table participants to manage.
The commission proposes a rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A
Another fantastic change. Currently, "solicitation of investors" (aka marketing your offering) can only be done after you've completed a compliance review with your offering platform and submitted your Form C to the SEC EDGAR system. It is the last step in the process before going live. This means that building awareness of your campaign before you've launched is, well, next to impossible. This rule change will allow for "test-the-waters" campaigns to be created, which allows you to publish an offering page and take non-legally-binding commitments from investors while you wait for your offering approval. That way, you can build as large of a "presale" campaign as you want and still be compliant. Very useful.
That about wraps it up. There's a few other changes in there that are being hotly debated by industry experts, specifically the Special Purpose Vehicle section. Take a look at the SEC's announcement here, and some of the debate around SPVs here. See you next time.
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