Congressman Patrick McHenry, the ranking member of the House Committee on Financial Services, has sent a letter to the Securities and Exchange Commission (SEC) urging them to move forward on improvements to Regulation Crowdfunding (Reg CF). The letter is addressed to SEC Acting Chair Allison Herren Lee.
Congressman McHenry notes that on January 20, 2021, President Joe Biden issued an Executive Order (EO) requesting a freeze on certain regulations pending a review. The EO was a broad-based policy demand that impacted various regulations that were in the process of becoming binding rules. While Reg CF may not be the target of the EO, Congressman McHenry worried that it may get caught up in the process. To quote Congressman McHenry:
“In particular, I am concerned about the effect of any regulatory freeze on necessary changes to the Regulation Crowdfunding rules. As I have communicated with the Commission on multiple occasions, the burdensome and prescriptive nature of Regulation Crowdfunding has stalled capital formation and investment opportunities. This complexity has prevented small business from accessing much needed capital for too long and hindered the development of innovative products and services. Further delaying these needed changes will only hurt market participants actively working to comply with the finalized amendments and will impede opportunities for small businesses.”
Reg CF is the smallest securities exemption for online capital formation. Under current rules, an issuer using the exemption may raise up to $1.07 million. This limited amount has been widely criticized by industry participants as too low of a threshold for many firms considering Reg CF. Additionally, for funding portals running a business based on issuing securities under this exemption, there is concern the amount is too small to make these platforms sustainable. In 2020, the SEC announced a decision to increase the amount to $5 million thus making the exemption more viable for both issuers and platforms operating in this sector of crowdfunding. At the same time, the Commission made several other improvements in recognition of the pressing need to address shortcomings of Reg CF, thus improving access to capital for smaller firms.
Today, industry participants are operating under the expectation that the increased funding cap will go into effect next week. There are reports of issuers waiting to file a Reg CF offering in anticipation of the improvements including the increased funding cap.
