Last week, the Securities and Exchange Commission announced a series of updates to the exempt offering ecosystem that included changes to online capital formation. While Reg CF received a nice increase from $1.07 million to $5 million, Reg A+ (Tier II) also received some attention being bumped up from $50 million to $75 million.
Several years ago, Nick Bhargava, co-founder of the real estate crowdfunding platform GROUNDFLOOR wrote an OpEd on why the Reg A+ funding cap should be increased. At that time, Congress was considering legislation to accomplish this task. While the legislation did not pass, the Commission eventually decided it was in need of improvement and, at some point early next year, issuers will be able to raise up to $75 million in an offering – a significant increase to the funding cap.
GROUNDFLOOR has long utilized Reg A+ to facilitate investment into real estate opportunities. Reg A+ allows both accredited and non-accredited investors to participate.
When Bhargava wrote his opinion, he had this to say:
If the cap grows to $75 million, I expect to see more medium-sized, private companies access this source of capital.
Why? For starters, medium-sized companies may feel stuck with the current capital limitations of Tier 2 because they can credibly raise more money.
For example, a medium-sized online store should have revenues north of $40 million. If we use comparable revenue multiples, that store should have an EV of close to $200 million. The business may want to, and can, credibly raise more than $50 million. But even with fewer disclosures, it’s still costly and time-consuming to take advantage of these exemptions, so raising the cap to $75 million means more of these companies will be willing to take the jump, knowing there is the potential for a higher outcome that makes it worth their while.
Following the SEC’s announcement, Crowdfund Insider reached out to Bhargava for some feedback on the changes. Our conversation is below.
In the past, you have advocated increasing Reg A+ Tier II to $75 million. It looks like you got your wish. How will this help GROUNDFLOOR? How will this help the real estate crowdfunding industry?
Nick Bhargava: The higher cap benefits us in terms of cost savings and operational efficiencies. Because we can sell more with one offering, and the costs of an offering are more or less fixed for us, we save money. Many issuers will see the same benefits.
A higher cap provides some interesting opportunities for single asset issuers. It becomes more feasible for commercial real estate developers to directly sell investments in parts of larger projects.
Will GROUNDFLOOR be using Reg CF now that it has been increased to $5 million?
Nick Bhargava: No, we do not have any plans to use Reg. CF right now.
Have you had time to review the entire 400-page long document? If so, what other updates do you deem as beneficial to GROUNDFLOOR?
Nick Bhargava: I have not dived into it yet given the time I have spent following the election.
What are the areas that still need improvement? Any thoughts on SPVs (special purpose vehicles) for Reg CF?
Nick Bhargava: The difference between an operating issuer and an SPV is a fine one. It could be interesting for a traditional SPV deal to offer a slice directly to retail, but SPV structure deal economics are very sensitive to scale and standardization.
How has GROUNDFLOOR been performing recently? Are you still experiencing robust demand as COVID lingers? What about offerings?
Nick Bhargava: Yes, we have been seeing fantastic demand from our retail investor base. As equity markets have become more volatile, more investors seem to be looking for a more stable and predictable investment that still offers attractive returns, and that’s what we offer.
Are there any concerns regarding the outcome of the US election?
Nick Bhargava: No, for us it will be business as usual.
Expectations for 2021? Any new plans?
Nick Bhargava: Given the global impact of COVID-19, we expect the U.S. economy will continue to perform acceptably in the near term. Housing demand is robust, in part due to low-interest rates, and there is plenty of investment opportunity.
We will continue to build our investment platform to take advantage of this and new investment opportunities, and we will have some exciting new product announcements in the next few months.