Wefunder has sent a letter addressed to the Securities and Exchange Commission (SEC). On the anniversary of the launch of Title III of the JOBS Act, or Regulation Crowdfunding (Reg CF), Nicholas Tommarello, co-founder and CEO of Wefunder, has taken a moment to reflect on basic improvements needed for Reg CF to function better.
Wefunder is the most active crowdfunding platform in the Reg CF space. To date, out of $35.4 million in Reg CF offerings, Wefunder has facilitated just under $20 million. Wefunder has listed 102 Reg CF offers with a solid 82% success rate for funding. Over 13,500 investors have participated on the platform with the majority of investments being less than $1000.
Each of the Wefunder’s recommendations are actions the SEC can unilaterally take. No act of Congress is necessary. While Reg CF is working, to a degree, everyone in the industry acknowledges that improvements must be made.
According to Wefunder these are the six necessary fixes they would like to see enacted:
Require verification of accreditation, income, or net worth for investments of $25,000+ in a year
Wefunder requires investors to provide documentation that they are accredited if they seek to make investments totaling $25,000 over the last 12 months. Even for Regulation Crowdfunding offerings, we voluntarily follow the same standard for verification as in Regulation D, Rule 506(c).
We believe the Commission should mandate that all platforms comply with a similar policy. The platform should take on the liability for this task, so the issuer can safely rely on the representation of the portal.
We believe it is important that accredited investors be able to use the existing infrastructure around 506(c) verifications and not burden them with an entirely separate process for a different exemption.
Switch “lessor of” to “greater of” for the calculation of investment limits
In conjunction with requiring verification of accredited status for investments of over $25,000 in a year, we recommend that the Commission change investment limits to the “greater of” income or net worth.
The current calculation of investment limits for Regulation Crowdfunding can lead to nonsensical outcomes: for instance, if a 506(c) verified accredited investor with $30 million in cash had a bad enough year in the stock market, they may legally invest only $2,000 that year in Regulation CF offerings.
We believe the “lessor of” standard reduces the likelihood of compliance and weakens the rule of law. Further, we believe that retail investors are better protected when accredited investors invest side by side on the same terms, under the same exemption. With the “lessor of” standard, accredited investors are often forced to directly contact the issuer and negotiate a separate Regulation D 506(c) deal.
Issue guidance that allows an issuer to “test the waters” if they file an incomplete Form C
Currently, many issuers are forced to spend over $10,000 on lawyers and accountants to prepare for a Regulation Crowdfunding offering. Over 25% of issuers then fail to raise any funds.
Congress intended Regulation Crowdfunding to help small businesses with limited access to capital. Instead, the current regulations force these early-stage companies to spend capital they cannot afford to lose on accountants or lawyers, before they are even allowed to discover if any investors are actually interested. The current regulations directly harm the issuers Congress intended to help.
We recommend that the Commission fix this injustice by allowing issuers hosted by a registered funding portal to file a partially complete Form C, if they clearly indicate that they are “testing the waters”.
This change would have no negative impact on investor protections. If the issuer decides to proceed with their fundraise and amends the Form C to be fully complete, all investors must reconfirm their commitment within 5 days or have their investment canceled, as a material change occurred.
If this guidance is offered by the Commission, Wefunder would encourage issuers to complete a draft of all Form C disclosures while including their existing cash-basis financials. Only after sufficient investor interest is proven should an issuer undertake the expense of converting their financials to GAAP, commission a CPA Review, or pay their law firm to carefully review the Form C.
Unlike Regulation A+, Reg CF issuers are required to use a regulated funding portal or broker/dealer. As such, we believe Reg CF investors should be allowed to transfer funds to an escrow account even if the issuer is testing the waters, so the issuer can be certain the investor interest is real. These funds would be refunded within 5 days should the investor not reconfirm their investment after a material change.
Provide clearer guidance that issuers may speak with investors face-to-face, if terms are not mentioned, and any new material information communicated is added to the Form C before closing.
Due to legal ambiguity, some lawyers recommend that issuers do not speak with potential investors face-to-face, and instead only direct them to an online funding portal for all information.
This leads to an absurd outcome that is terrible for investors: potential investors lack the opportunity to look a business owner in the eye and ask the hard questions. Instead, retail investors are making a decision based solely on an online web page presentation. Rather than investors having the opportunity to talk to owners face-to-face, only the funding portal can. Wefunder does not want this role.
We believe the intent of Congress was for neighbors to fund their local businesses. Wefunder also has data that up to 80% of the funding volume for some main street businesses comes from customers who frequent that store. These investors deserve in-person answers.
We recommend that the Commission offer guidance that allows a business owner to hold a public investor information session, provided that terms are not mentioned, all investors are directed to the portal to make their investment, and any new material information conveyed is included on the Form C.
Currently, if the issuer holds a public session, Wefunder recommends that issuers live-stream it on the Wefunder portal in real-time. We display the video on their profile, and transcribe it and upload to EDGAR before closing. We believe this is the best balance between allowing investors to get face-to- face answers while ensuring all investors get equal access to information so the “wisdom of the crowd” may work. We would like the SEC to offer clear guidance that this is permissible.
Allow funding portals to file Form C-U’s on behalf of the issuer after funds are released from escrow
Currently, issuers must file a Form C-U within 5 days of closing with the amount raised. Many do not.
The Commission wrote the final rules assuming money can be transferred more quickly than reality dictates. Wefunder often does not clear all funds for release until several weeks after the closing, due to delays in mailing checks, ACH processing time, KYC requirements, or investment limit verification.
We recommend that the Commission modify the rules to mandate that the portal file a Form C-U within 5 days of funds being released from escrow (instead of within 5 days of closing). Further, we don’t believe the issuer should be burdened with contacting their board members and officers to sign off on a Form CU; instead Wefunder can easily take on the responsibility of reporting the funding total to EDGAR.
Amend Rule 12(g)(6) to treat Regulation Crowdfunding similarly as Regulation A+
The House of Representatives passed the Fix Crowdfunding Act 394-4 last August. This bill exempts securities from 12(g) until the issuer has $50 million dollars in revenues or $75 million in public float.
As the Senate has yet to act, we recommend that the Commission modify the 12(g) exemption on their own authority. As sophisticated issuers will not allow themselves to be prematurely subject to the Exchange Act, securities sold in Regulation Crowdfunding offerings often allow the issuer to repurchase. Should the issuer repurchase securities to remain under the 500 unaccredited investor limit once $25 million in assets are about to be reached (such as just before the next venture capital investment), unaccredited investors will be harmed. Despite taking all of the risk at the earliest stage, retail investors will not be allowed to hold onto their equity stakes long enough to realize the ultimate reward.
The actual letter signed by Tommarello is embedded below.