CI recently published an update on Reg CF [Regulation Crowdfunding], an exemption that allows a business to raise up to $5 million in an online securities offering. Investors may be non-accredited or accredited. While the legislation creating Reg CF was signed into law in 2012, it too several more years for regulators to enable issuers to raise capital under the new rule. Starting in 2016, Reg CF has now helped thousands of businesses to raise hundreds of millions of dollars online. This has led to tens of thousands of new jobs. But while not all businesses will be successful, some will – that is how a market economy works.
But two other securities exemptions allow for online capital formation. Reg A+ and Reg D 506c.
Under Reg A+, an issuer may raise up to $75 million from anyone in an offering that must be qualified by the Securities and Exchange Commission. This requirement, along with the need for in-depth offering documents alongside an option to trade issued shares immediately, has led to some calling Reg A+ a Mini-IPO.
Under Reg D, a company may raise an unlimited amount of funds, but investors must be accredited. Reg D 506c is the iteration that allows a firm to raise money online – or “generally solicit.” Investors must be qualified as accredited in the process – a requirement some have criticized as creating an unnecessary hurdle diminishing the exemptions utilization.
So how are these two exemptions doing? Most online investment platforms offering primary issuance allow for all three exemptions. Frequently, a Reg D offering is pursued alongside a Reg CF to allow for more money to be raised.
Not too long ago, the SEC completed a report reviewing access to capital, and it included information on all three exemptions. The shortcoming is that it is information aligning to the SEC’s fiscal year, so not a calendar year. That being said, it is interesting to review the data provided.
The data in the SEC Office of the Advocate for Small Business Report is derived from public filings with the SEC, as analyzed by the SEC’s Division of Economic and Risk Analysis (DERA).
As DERA reports from July 1, 2021, to June 30, 2022:
- Reg A+: $1.8 billion – $2.2 million median amount raised
- Reg D 506b: $2.3 trillion – $1.3 million median
- Reg D 506c: $148 billion – $800,000 median
Other exempt offerings, including amounts raised under Regulation S, and Rule 144A, raised $2 trillion during the period.
While Reg A+ issuers raised $1.8 billion, offering documents indicate they sought up to $6.12 billion. The most active sector under Reg A+ is real estate by far at $755 million during the period followed by banking and financial services at $375 million.
When looking at Reg D, pooled funds account for over 85% of the money raised. When you remove pooled funds, other issuers raised in total during the 2021-2022 period $331 billion. Tech firms are the biggest issuers (ex-pooled funds).
For comparison, IPOs during the same period generated $126 billion for a median amount of $150 million. So you can see that Reg D is a far larger path for raising capital.
The exempt offering ecosystem in the US is vital to fostering a robust economy, enabling entrepreneurship and innovation. Access to capital is the number one challenge for firms to stay in business, with 75% of entrepreneurs reporting challenges in accessing finance.
These private firms are typically smaller than public corporations with 66% of small businesses generating 66% of employment growth over the last 25 years, according to the report.
While the current funding environment has been effective, more must be done and policymakers should be keenly aware of the need to improve access to capital and not limit it, as this is what creates jobs and prosperity for the country.