Upgraded Crowdfunding

The United States Securities and Exchange Commission (SEC) put out a press release on March 4, 2020 with some exciting news for all of us entrepreneurs – they have significantly upgraded crowdfunding and its rules! The SEC says “Proposed amendments would provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections.“

The highlights of the upgraded crowdfunding

Here are some of the highlights of the SEC’s proposed amendments:

• Reg CF max raise now = $5M
• Reg A max raise now = $75M
• Accredited investors can now invest in Reg CF offerings (prior to this, issuers had to conduct concurrent Reg D offerings along with a Reg CF)
• Non-accredited investors are now subject to investment limitations based upon the “greater of” their income or net worth instead of the constricting “lesser of” rules
• Special Purpose Vehicles (SPV) are allowed to invest in Reg CF offerings
• SAFE notes no longer allowed in Reg CF

Exciting News

This is the most exciting news for the industry in 8 years, since the birth of the JOBS Act in April, 2012. This is a GAME CHANGER for the crowdfunding industry, and for private capital formation. Reg CF now becomes truly usable by almost all real estate businesses, as well as start-up and medium-sized businesses of all types. Crowdfunding Portals can now flourish, which will in turn not only help more businesses get funded, but also protect the public by ensuring that offerings are done in compliance with securities regulations. It means Reg A can be used by even larger businesses. It means the general public has better access to alternative investments, giving them nearly the same wealth-building opportunities that historically have been reserved (by securities regulations) only for the very rich.

This also means more disclosures and more transparency. Which may in turn help accelerate the dawn of a new age of Alternative Trading Systems (ATS) which focus on secondary markets for private securities – in our opinion, a huge need in the crowdfunding industry right now. And it means the dream of disruption and innovation in our capital markets is now within reach.

Simple Agreement for Future Equity (SAFE) notes

If you have gone through the hundreds of Reg CF offerings as we have, you would have seen approximately 20.9% of all of the Regulation CF have used Simple Agreement for Future Equity. This always astounded me because it literally wasn’t in the best interest of non sophisticated investors, which is the whole part of Reg CF.

Apparently I’m not the only one who thought that SAFE notes were not safe nor simple as the SEC warned against them in 2017 and Start Engine has precluded their use on its platform. For a more in depth discussion, see Start Engine’s CEO Howard Mark’s blog discussion entitled “Are SAFE Notes Not Safe for the General Public?“

The Time Frame

When do these new rules go into effect? Not immediately, so don’t start trying to use them today. Soon though, 60 days after publication in the Federal Register. Make sure you read the SEC’s press release, available here…

Of course, DSV Consulting LLC provides crowdfunding support with our management consulting.

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