SEC Proposes Major Rule Changes
This week, the Securities and Exchange Commission (SEC) announced major proposed changes to multiple securities exemptions, including Regulation Crowdfunding, as well as Rule 504, Rule 506(b), Rule 506(c), and Regulation A. This is the most significant regulatory update since the passing of the JOBS Act eight years ago, in 2012.
Last summer, MicroVentures, along with our fellow AOIP members, published a policy paper outlining a series of recommendations that we believe could improve current Regulation Crowdfunding rules. We’re pleased to report that many of the improvements we suggested have been addressed in these proposed changes, and we expect that their implementation will make the Regulation Crowdfunding space work better for both issuers and investors, while not diminishing any of the protection characteristics.
Investing Through Special Purpose Vehicles (SPVs)
Historically, investing through a Special Purpose Vehicles (SPVs) has been limited to private offerings primarily available to accredited investors and was not allowed for Regulation Crowdfunding offerings. Under these new proposed changes, SPVs may now be included in Regulation Crowdfunding offerings. These crowdfunding vehicles would allow an issuer to maintain a simplified cap table, maintain investor protections currently in place, and could potentially offer additional benefits, such as allowing smaller investors to invest alongside a sophisticated lead investor better able to negotiate investment terms.
“Testing the Waters” Extended to Regulation Crowdfunding
Under Regulation A+, issuers are able to differentiate between offering securities and selling securities. The offering of securities effectively allows them to “test the waters.” This allows them to gauge investor interest in a raise before committing time and money to the process of launching a full raise that may or may not succeed.
Proposed changes would allow Regulation Crowdfunding to utilize this “testing the waters” concept as well, which could offer similar advantages to companies considering a Regulation Crowdfunding offering. These changes would allow issuers to engage in generic test-the-waters communications in order to solicit investor interest before incurring the full costs of preparing and filing offering materials. If an offering isn’t something investors are interested in quite yet, it could save an issuer time, money, and reputational cost.
Annual Limits on Raises Increased
Currently, the limit on how much a company can raise through Regulation Crowdfunding is capped at $1.07 million in a 12-month period. The SEC is proposing bumping this 12-month cap to $5 million, which could be appealing to larger startups who need to raise more than the $1.07 million limit.
Additionally, the annual cap for Regulation A Tier 2 offerings could be raised from $50 million to $75 million, potentially making it a more attractive financing option for medium- and larger-sized privately-held companies.
New Investment Limits for Accredited and Non-Accredited Investors
In the past, both accredited and non-accredited investors have been subject to annual limits on how much they can invest in Regulation Crowdfunding offerings. Once these changes take effect, investment limits for each will be more relaxed:
- Non-accredited investors: Limits for non-accredited investors will be based on the greater of net worth or income, rather than the lesser of net worth or income.
- Accredited investors: Accredited investors will no longer have any limits on how much they can invest in a Regulation CF offering. This could eliminate the need for side-by-side offerings.
Impact on the Regulation Crowdfunding Space
According to the SEC, these changes are intended to “…provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections,” and we’re optimistic that they will be a huge step forward for the Regulation Crowdfunding industry as a whole.
We believe that these changes will make Regulation Crowdfunding a more viable funding option for business of different sizes and types, further opening the industry. We also believe that they give the general public wider access to alternative investments and potential wealth-building opportunities.
These proposed changes are better aligned with the actuality of the Regulation Crowdfunding space, and we’re eager to see them potentially take effect. Before final approval, a public comment period for the proposed rule amendments will be held for 60 days following the publication of the release in the Federal Register.
Until then, we are excited about this progress and are looking ahead to being better able to serve our issuers and investors.