On March 15th, the SEC confirmed capital formation increases for Regulation A+ and Regulation CF
This week, the long-awaited updates to equity crowdfunding regulation were put into effect. We’re pleased that the freeze placed on regulatory changes by the new administration in January did not impact the effective date of these changes.
For further detail, we published a blog post on January 29th explaining the proposed crowdfunding updates and the timeline that’s brought us to this point.
SEC-compliant offerings give small businesses an alternative method to raise capital
Equity crowdfunding gives issuers SEC-compliant tools for tech-based securities offerings, and we have the JOBS Act to thank for it. The Jumpstart Our Business Startups Act (JOBS Act) was developed to create more opportunities for small businesses -- it levels the playing field for issuers and investors. In particular, the JOBS Act provides a path to capital for businesses with founders from communities with less access to traditional investors and for minority-owned businesses, which have historically been disadvantaged by restrictive investment solicitation regulations.
Also referred to as securities-based crowdfunding, this kind of public capital formation is an alternative to soliciting investment through an initial public offering (IPO), venture capital firms, or pre-order platforms that support development of specific projects. Because it gives issuers and investors greater opportunities to access growth capital and yield, equity crowdfunding is essential to economic development. We’re looking at two exempt offering frameworks: Regulation A+ and Regulation Crowdfunding (CF).
Introducing the updated Reg A+ and Reg CF exemptions
The maximums for capital raises have been increased. This makes equity crowdfunding far more usable for larger businesses, resulting in a larger market of potential issuers and greater availability for investors. By raising the maximums, the cost of capital will be reduced, helping ensure that each crowdfund campaign will be worth the financial, legal, and marketing costs.
Under the new rules, issuers are permitted to raise up to $75 million per year through a registered broker dealer -- an increase from $50 million. Companies can also raise the maximum offering amount for secondary sales under Tier 2 of Regulation A, from $15 million to $22.5 million.
A Regulation A+ crowdfunding campaign and offering must be filed with the SEC in order to be qualified. The process can take approximately six months to complete. Participating investors can sell their shares immediately, there is no lock up period on the securities. Issuing companies can launch a campaign to “test the waters” (TTW) before committing to a campaign structure to understand investor sentiment and allow investors to reserve investment.
Regulation Crowdfunding (CF) allows companies to publicly raise capital by selling securities like stock shares or debt online. With Reg CF, companies can raise up to $5 million per year through a funding portal or broker-dealer, up from $1.07 million. Launching a campaign can take as little as four weeks.
This exempt offering framework gives companies the option to run follow-on Reg CF campaigns after waiting only 30 days, compared with the previous 180 day waiting period. This means that if a company successfully closes a crowdfunding campaign, they can quickly set up a new raise under new terms to take advantage of their momentum. Like with Reg A+, companies can “test the waters” under Reg CF to gauge public interest and allow reservations for investment.
Under the new rules, investment limits are removed for accredited investors. The investment limit is also increased for non-accredited investors. This limit is now determined by the greater of their annual income or net worth -- previously it was determined by the lesser number.
Equity crowdfunding can give your business the capital it needs to succeed
FundAmerica, a Prime Trust company, makes crowdfunding smooth for both issuing companies and investors. FundAmerica provides SEC-compliant tools for securities offerings. These tools include an easy-to-install widget that places an Invest Now button on your campaign website, making participation simple for investors. The FundAmerica platform also offers companies crowdfunding solutions for a robust AML and KYC compliance program, payment solutions for various types of transactions, custody for digital assets, and escrow services for funds processing.
The updates to equity crowdfunding regulations encourage greater participation from a broader array of companies and investors. Improved pathways for companies to reach investors and for investors to access growth opportunities will have a broad positive impact. We can help make it happen. Learn more about our crowdfunding solutions.