The SEC Small Business Capital Formation Advisory Committee (SBCFAC) has posted its recommendation to the Commission, taking the stance that issuers using Regulation Crowdfunding (Reg CF) should receive some relief under the current requirement to provide reviewed financials starting at an offering of $124,000. The Committee said the threshold should be moved higher to $350,000 before reviewed financials are required. The recommendations was anticipated following a meeting of the group.
Last May, the Committee held a meeting during which Reg CF was discussed. The group sought ways to improve the ecosystem. A presentation was delivered that showed data that Reg CF was providing access to capital for underserved entrepreneurs. For example, minority participation has increased from around 18% in 2016 to over 30% in 2022. Support of female founders has grown as well. Part of the discussion revolved around increasing the threshold of reviewed financials.
During the COVID health crisis, the threshold was temporarily increased from $107,000 to $250,000. The level reverted in 2022.
Some members of the Committee thought the threshold should rise to $500,000.
One of the justifications for increasing the threshold was the cost of providing the information. Reviewed financials can cost a firm up to $10,000 a year, before raising any funds. For an issuer raising $124,000 this simply does not make much sense for both sides of the investment. Add the cost of accounting to the overall cost of raising funds online and the benefit of raising smaller amounts under the exemption declines even further. The cost to leverage the exemption may be around 20% of the offering.
One member of the Committee noted that the average size of an SBA loan stands at over $500,000, and the cost for smaller firms to access capital from traditional providers can be excessive.
To quote the recommendation issued by the Committee:
“The Committee recommends that under Regulation Crowdfunding the Commission increase the offering threshold at which reviewed financial statement are required from $124,000 to $350,000. This would allow companies that are offering less than $350,000 in securities within a 12-month period to use certified financial statements and certain tax return information, in lieu of financial statements reviewed by a public accountant that is independent of the issuer. The Committee further recommends that two years after the $350,000 threshold becomes effective, the Commission review such threshold to consider whether or not to further escalate the threshold above $350,000.”
While the recommendation appears to be common sense, the current Commission has been less inclined to support smaller firms and facilitate access to capital. This characteristic has lead to the comment from one insider that the Comission is anti-capital formation.
This is SBCFAC’s second recommendation this year. The first was for the Commission to expand the definition of an Accredited Investor – making it more inclusive. The definition currently excludes the vast majority of Americans, effectively disenfranchising individuals from participating in private markets under securities issued under Reg D—a multi-trillion dollar market.
