The US Securities and Exchange Commission (SEC) recently announced changes to Regulation Crowdfunding (Reg CF) meant to increase the usefulness of crowdfunding as a fundraising medium for small businesses. The changes, expected to go into effect in early 2021, include:
- Increasing the maximum amount companies can raise from $1.07M to $5M (inflation adjusted).
- Amending the investment limits for investors by 1) removing investment limits for accredited investors and 2) using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors.
- Extending the COVID-relief measures of Regulation Crowdfunding for an additional 18 months.
- Permitting “test-the-waters” communications, which allows issuers to solicit interest from investors prior to filing the offering documents.
- Permitting “demo day” communications that would not be deemed general solicitation or general advertising.
- Permitting Special Purpose Vehicles in Regulation Crowdfunding offerings.
The SEC first allowed equity crowdfunding in the spring of 2016 under rules developed pursuant to Title III of the JOBS Act of 2012. In the years since, Reg CF has become a highly effective method for small businesses and develop stage startups to access capital earlier than traditional financing might be available. Reg CF investors have the ability to take a personal stake in companies close to home (restaurants, distilleries, breweries) or in highly speculative or risky projects that may not otherwise be funded.
Generally, companies that wish to raise money using equity crowdfunding (“issuers”) must file an offering statement with the SEC on Form C, including reviewed or audited GAAP basis financial statements for the company’s two most recent annual periods, must conduct the offering through a FINRA registered intermediary, and must meet certain other regulatory requirements such as prohibitions against so-called “bad actors.” Issuers are free to raise as much money as the law allows on whatever terms can be sold to potential investors.
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