Last year, MicroVentures helped to found the Association of Online Investment Platforms (AOIP) with Seedinvest, Nextseed, and Republic, in an effort to promote the responsible growth of private investment platforms, better educate the public about investing in private companies, and democratize the investing process. This summer, we, along with our fellow AOIP members, published a policy paper that included a series of recommendations to Congress that we think could improve current Regulation Crowdfunding rules.
We believe these policy changes could further open up Regulation Crowdfunding and better serve not just investment platforms, but issuers and investors.
Increased Maximum Offering Size
Under current regulations, the maximum amount a startup can raise in a given 12-month period is $1.07 million. By raising this limit, we believe that Regulation Crowdfunding could become a more attractive option for growing companies who need more than the current $1.07 million limit. Larger offerings may also help better position fast-growing companies for a future Regulation A+ or Regulation D raise.
Accredited Investor Limits
Today, both non-accredited and accredited investors are limited in how much they can invest in Regulation Crowdfunding offerings on an annual basis. As accredited investors are not currently limited under other exempt offering types, such as Regulation D or Regulation A+, this limitation seems arbitrary.
Accredited Investor Definition
Accredited investors are currently defined by wealth, rather than by their understanding of investing. It would be beneficial for issuers, investors, and the industry for accreditation status to be based on financial sophistication, rather than personal wealth.
Non-Accredited Investor Limits
For non-accredited investors, investment limits are currently based off of their total amount invested in Regulation Crowdfunding offerings in a given year. We believe that both issuers and investors would be better served if investment limits were applied on an investment-by-investment basis. Given the various industries, business models, and security types offered, levels and types of risk can vary across Regulation Crowdfunding investments.
Additionally, existing rules under Regulation Crowdfunding take into account both income and net worth and set investment limits based upon the lower of the two. To further democratize early-stage investing, we recommend amending this rule to calculate investment limits based off of high income or high net worth.
Additional Operational Flexibility for Investment Platforms
Special Purpose Vehicles (SPV) & Nominee Structures
Special Purpose Vehicles are often used in private equity for good reason – they make it easier for issuers to manage smaller investors, they keep the cap table clean, and they offer a single communication point. For investors, they offer better protection of their rights, particularly in the case of preventing dilution. By allowing investment platforms to act as a nominee, they are better able to protect their investors while issuers can more easily communicate with their investors while also avoiding cluttering their cap table.
Testing the Waters
Under Regulation A+, there is a differentiation between the offer of securities and the sale of securities, which allows issuers to “test the waters;” i.e., see if there is any investor interest in the purchase of securities. Opening this concept to companies pursuing a Regulation Crowdfunding offering could be especially beneficial, as it can save both time and money spent on an offering that investors may not yet be interested in.
Reporting & Disclosure Obligations
At this time, businesses looking to raise funds under Regulation Crowdfunding must comply with burdensome reporting and disclosure obligations, including reviewed and/or audited financials for offerings greater than $107,000. For small companies with either little or very simple financial history, a full financial review can be expensive and in some instances, arguably unnecessary. We propose that it would be in the best interest of both issuers and investors that offerings be exempt from these requirements unless the offering is much larger ($1 million or greater) or the business history is complex enough to merit verification via a review or audit.
Tax Exemption Status
A tax exemption for Regulation Crowdfunding investors would serve multiple ends – it could mitigate risk for smaller investors while also encouraging private investment in small businesses.
Takeaways
Since 2012, the JOBS Act has given startups and small businesses the ability to raise the capital needed to grow, while also offering small investors the opportunity to invest in early-stage companies. Although progress has certainly been made in opening up the startup investment space, regulatory limitations have limited that growth. By amending the current regulations to better align with the reality of the Regulation Crowdfunding investment space, we believe the industry will be able to reach its full potential, while better serving investors, issuers, and platforms.
