Recently, CI shared its thoughts on what could be improved, via rule changes or legislative action, to boost online capital formation. Specifically, under Reg CF and Reg A.
Reg CF, Reg A, and Reg D 506 (c) each enable online capital formation. Reg CF and Reg A offerings are available for retail participation, while Reg D is accessible only to Accredited Investors. As the rule stands today, Accredited Investors are generally individuals who earn over $200,000 a year ($300,000 if married) or have a net worth of over $1 million, not counting a primary residence. While time has eroded this rule since it was created in the 80s, it still acts as a barrier for most of the population, as it discriminates against individuals who are less affluent but may be very sophisticated in capital markets.
Reg CF and Reg A were creations of the JOBS Act of 2012. While Reg A existed before that in an unusable form, the JOBS Act recognized this shortfall and improved the exemption.
Today, Reg CF and Reg A enable thousands of firms to raise money online, typically with support from a platform that promotes or enables the offering for private firms. While the evolution has had its ups and downs, raising funds online is here to stay and represents the future of primary (and secondary) offerings.
Following this publication’s recommendations on improving these two exemptions, CI reached out to Brian Belley, CTO of Kingscrowd and the current President of the Crowdfunding Professionals Association (CfPA). Belley said that he and the CfPA share several of these recommendations; he also expanded on other areas he believes need more attention.
Belley said that, in his view, the overarching principle is to scale these exemptions appropriately with the issuer’s size and maturity, reduce regulatory friction that doesn’t provide meaningful investor protection, and increasingly focus on what happens after the raise as well.
In regard to current funding caps, Belley had this to say:
“For both Reg CF and Reg A, I strongly support raising both caps (Reg CF to $20 million, Reg A Tier 2 to $150 million). These are both CfPA Policy positions. The most common pushback I hear is “so few raises hit the cap today, why raise it?” The answer is not only a lower cost of capital for entrepreneurs, but also access to higher-quality deals for investors. At Kingscrowd, we clearly saw a jump in the types of issuers that entered the market when the cap was raised from $1.07M to $5M, bringing in more mature issuers for whom that made a difference. And if we truly want to democratize investing for the average American, we need exemptions that are competitive enough to attract strong companies that have other sources of capital available to them. Retail investors shouldn’t only get access to companies that couldn’t raise elsewhere.”
Regarding Reg CF specifically, Belley said his top priorities would be to;
- Scale financial statement requirements. For smaller offerings and companies with very little operating history, CEO-certified or otherwise simplified financials can be appropriate. Reviews and audits should be required where they provide meaningful additional investor protection, not simply because every issuer crosses the same arbitrary threshold.
Interestingly, the SEC’s proposed Regulation Crypto Assets reflects a similar concept of scaling requirements: its proposed startup exemption would allow up to $5 million with principles-based disclosures, while larger offerings under its fundraising exemption would carry financial statement and ongoing reporting requirements. We shouldn’t keep creating a patchwork of exemptions with materially different burdens unless there is a meaningful reason for the difference. See comment below about Brian Christie’s article on the principle of “presumptive parity”. - Simplify the advertising and communications rules. They are unnecessarily difficult for ordinary small businesses to navigate and create inadvertent compliance traps without necessarily making investors safer. Most issuers don’t understand them, and even if they do, it’s easy to accidentally break them. We shouldn’t be making it so hard that people would rather not say anything (or worse, put giant disclosures on every little social post, which investors won’t read).
- Improve C-AR compliance and filing. The SEC should make annual reporting dramatically easier, including automated reminders and a much simpler filing interface. Platforms should also clearly educate and remind issuers about the obligation, while the ultimate responsibility remains with the issuer.
Make liquidity and transferability a real priority. That includes secondary markets, transfer agents, brokerage custody, settlement and the ability of investors to actually realize value when opportunities for liquidity occur.
Regarding liquidity, Belley said he strongly supports addressing state Blue Sky barriers to enable trading for both Reg A and Reg CF.
“… his is timely given the SEC’s Regulation Crypto Assets proposal, where the Commission is proposing preemption of state registration and qualification requirements for qualifying secondary trading. My view is that comparable capital-raising pathways should start with comparable opportunities and burdens unless there is a meaningful reason for different treatment.”
Belley added that EDGAR modernizsation is something that CI did not list but he believes there are significant issues today with data quality, usability, machine readability and investors’ ability to efficiently research exempt offerings in EDGAR.
“CfPA has previously advocated for searchable filings, and Kingscrowd recently submitted a more detailed set of EDGAR modernization recommendations. I’ve attached that comment letter if useful.”
On the topic of pairing professional money, like VCs and angels, Belley said he really likes the concept but he would frame it less as allowing professionals to promote offerings and more as making it advantagious for these progessional investors to co-invest alongside the crowd.
“If a sophisticated investor has actually invested meaningful capital on the same economic terms as retail investors, that is absolutely useful information and can be a valuable quality signal. Our rules shouldn’t make it harder for retail investors to know that. We should allow that while maintaining clear rules around compensation, conflicts, special terms and misleading endorsements.”
Belley noted that one area he has focused on during his tenure at the CfPA is shifting the conversation from simply access to capital to better outcomes for all.
“Raising more capital matters, but so do repeat investor participation, issuer stewardship, sustainable intermediaries, and actual paths to liquidity. I think regulatory modernization should increasingly be judged against that full lifecycle.”