The Evolution of Equity Crowdfunding
By: Heidi Abdul, Corporate Consultant and Auxana member
Don’t have millions to invest but want to have equity in a startup? Need capital to take your company to the next level but don’t have a broad network of investors? Regulation Crowdfunding could be your answer, especially with the updated statutory provisions. This relatively new funding opportunity, also known as equity crowdfunding or Reg CF, is another way to enter into a private securities transaction while remaining exempt from SEC registration. As Regulation Crowdfunding continues to grow in popularity, the SEC continues to modify and simplify the existing regulations, benefitting both business owners and investors.
How Did Equity Crowdfunding Get Its Start?
According to the Office of the Advocate for Small Business Formation, crowdfunding is “… the practice of raising capital in relatively small amounts from a large number of investors, typically over the internet.” And although we hear the term “crowdfunding” a lot now, the first person to actually use the term as we do today was Michael Sullivan of FundaVlog in 2006.
Fast forward to the financial crisis of 2008… banks aren’t lending to small businesses, the rules change, and of course… out of the crisis, an innovative solution became more mainstream – crowdfunding portals.
Portals continued to pop up and crowdfunding developed into many different sub-sectors – some more regulated than others. As the name implies, Regulation Crowdfunding is the type sub-sector with more regulation because it involves commercial investments. Under Regulation Crowdfunding, eligible companies can offer and sell securities through SEC-registered intermediaries, typically through one of these online portals.
Regulation Crowdfunding really started to shine in the US after passing the 2012 JOBS Act and the finalization of regulation by the SEC in 2015, both of which relaxed regulation on who qualified as an investor through these online portals.
Just five years later, Reg CF private placements totaled $88 million for the 2020 fiscal year with a median size offering of $100,000. The number of Form C & Form C/A filings (required for Reg CF) more than doubled from 2019 to 2020, highlighting the exponential growth of Regulation Crowdfunding. This steep growth triggered further regulatory revisions to adapt to the growing demand for this funding opportunity.
Reg CF Eligibility Now and in the Future
Regulation Crowdfunding is a great opportunity for seed-stage businesses looking to raise funds in small amounts from multiple investors when they don’t have a large pre-existing network. But not all companies are eligible to take place in Reg CF offerings. Here are some of the critical qualifications to consider before evaluating a Regulation Crowdfunding offering:
- All transactions must take place through an SEC-intermediary. This could be a dealer-broker or funding portal.
- Offering limit of $1.07 million in a 12-month period (this will be updated to $5 million under the adopted amendments)
- Limitations on the amount individuals can invest across all crowdfunding portals (this will be updated to where accredited investors will have no limits and non-accredited investors can use the greater of their net worth or income to calculate the limit)
- Form C must be filed with the SEC before the offering starts
- Does not allow general solicitation other than to direct potential investors to visit the offering’s funding portal (this will be updated to allow general solicitation to test the waters of the offering before filing Form C)
- States have varied filing requirements and should be considered before starting your equity crowdfunding offering. These can include further limitations on investors, pre-registration filings, limitations on offerings, and additional audits.
Other adopted amendments include:
- Audited financial statements required for raises of $500,000 or more.
- Special Purpose Vehicles (SPVs) that function as conduits for investors will be permitted.
- Bad actor provisions will be more consistent across Reg D and Reg CF, compared to the differences between the current regulations.
In a nutshell, Regulation Crowdfunding is a relatively new private placement opportunity exempt from SEC registration that will only continue to grow under the adopted amendments. These amendments make it easier to raise more capital from more investors with increased limitations on offer size and relaxed restrictions on individual investors, reducing the overall cost per dollar of Regulation Crowdfunding.
Navigating the SEC’s adopted amendments and keeping up with the constantly developing crowdfunding portals can seem overwhelming. You should be excited about this opportunity rather than dreading the compliance side of Reg CF. With proper planning and an innovative team of consultants and securities attorneys, your Regulation Crowdfunding offering will go from overwhelming to energizing. Contact us for more information!
DISCLAIMER: This blog does not contain or constitute legal advice and we are not a law firm nor will we provide legal advice. Auxana Inc. is not a law firm, does not provide any legal services, any legal advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, or any lawyer referral services, and does not provide or participate in any legal representation.