Regulation Crowdfunding, or Reg CF, is the smallest security exemption that enables online capital formation. Currently, Reg CF enables an issuer to raise up to $5 million in a securities offering that needs only a notice filing and can solicit from both Accredited and non-Accredited Investors. This small amount can be augmented by pursuing a simultaneous Reg D offering, but it is typically for startups and the smallest issuers.
One nuance of the exemption is that issuers set the minimum target amount for funds raised in a security offering. While many hope to raise millions in funding, many issuers set the minimum target amount ridiculously low and therefore can claim to have successfully raised funds. The reality can be very different, though, as funds raised may bring little to the firm in its drive to sustainability. Issuers should raise sufficient funds to execute on their goals and, at a minimum, reach their next funding round. This is how the venture capital industry operates.
A recent online discussion highlighted this shortcoming, which artificially inflates the percentage of successful Reg CF offerings but obscures issuers who probably can’t continue operating by raising, say, $10,000 or $20,000.
Sherwood Neiss, founder of Crowdund Capital Advisors, stated in a post that “an offering can be ‘successful’ without really proving much at all.” Neiss was one of the creators of Reg CF.
Mark Roderick, a well-known securities attorney operating in the Reg CF sector, says he has sent feedback to the SEC that issuers should disclose what goals, if any, can be achieved by raising the minimum amount. Perhaps this should be extended to require the issuer to disclose whether the funds will enable it to reach the next funding round or, alternatively, achieve profitability.
Platforms that list or support issuers using Reg CF can also play a role in channelling issuers in the right direction. While the company raising the money has the final decision, platforms can share that a successful raise that accomplishes little is harmful to both the issuer and the investors who committed their funds.
In a blog post from several years ago, Roderick states that “Artificially low target amounts carry a long-term downside for the platform, too. I would argue that as long as issuers are establishing $10,000 minimums, Title III [Reg CF] won’t be taken seriously as an asset class, and the industry won’t grow.”
Last year, Roderick continued the theme, declaring “artificially low minimums” are bad for investors and bad for the industry.
“And we don’t need them,” stated Roderick.