Regulation Crowdfunding (Reg CF) and Regulation A (Reg A) were both part of the JOBS Act of 2012, the legislation that enabled online capital formation. Today, there is an established ecosystem of platforms including regulated Funding Portals and Broker Dealers that support companies that need to access growth capital by selling securities online.
Under current rules, an issuer may raise up to $5 million using Reg CF by submitting a notice filing to the Securities and Exchange Commission. Anyone may invest in these offerings with certain funding caps set in place.
For Reg A, a rule that existed before the JOBS Act but was utilized by very few issuers do to shortcomings, an issuer may raise up to $75 million by submitting an offering document to the SEC which then must qualify the document for the firm to sell securities to the public. Once again, anyone can participate in these securities offerings within certain investment caps.
Both securities exemptions have been adjusted slightly since they initially went into effect (which took some time after the JOBS Act legislation became law). Perhaps most importantly the funding cap on each exemption was adjusted with Reg CF moving from its initial $1 million funding cap, which was profoundly flawed and unworkable, to $5 million, and Reg A moving from a $50 million to $75 million funding cap.
Regarding utilization of these exemptions there has been some choppy growth and this sector of finance continues to adjust and adapt. Most online capital formation platforms support both Reg A and Reg CF, alongside Reg D 506c, a far simpler path to raise money online which is mostly restricted to Accredited Investors.
So what could policymakers, including the SEC, do to improve these two exemptions? Below are several possible moves which the SEC could take to boost the efficacy of these two exemptions.
Reg CF
Increase the funding cap to $20 million. This change is advocated by industry insiders. They envision a more effective capital ladder that allows smaller investors to access better established, early stage firms. Today, the median Series A funding round is around $15 million with averages nearing $20 million.
Enable CEO certified financial statements of up to $500,000 to mitigate the high cost of accounting review.
Eliminate the funding targets set to low minimums like $10,000. Some firms due this to show “success” but it is really a negative indicator.
Facilitate secondary trading to improve liquidity for investors.
Work to enforce Form C-AR. Too many issuers ignore or forget it. A basic annual update should be simple enough that issuers complete it. Issuers that do not complete the form undermine the entire sector. Platforms should be part of the solution.
Create a tax emption for investors who participate in these funding rounds to mitigate risk. This would take an act of Congress. Review the UK EIS/SEIS tax programs which incentivize early stage investment.
Reg A
Speed up Form 1-A review by the SEC. The qualification process for an initial submission can take a long time. This hurdle pushes issuers away from using the exemption. Set firm deadlines. Some insiders have complained in the past that a company could go bust before an offering is qualified, thus pushing them to use the simple 2 pager Reg D exemption.
Simplify ongoing reporting for more scaled disclosure for Tier 2 issuers.
Pre-empt Blue Sky/state impediments for secondary trading. Preemption is already in place for Tier 2 for the primary offering. This should hold true for secondary transactions. The states need to get out of the way.
Raise the funding limit under Tier 2, perhaps to $150 million. The US needs more publicly traded firms and this could support this objective as issuers can choose to immediately trade on an exchange (Or ATS).
Basically, policymakers should look to make using these exemptions faster, cheaper and more effective. Supporting innovation and entrepreneurship is a vital policy that all elected and appointed officials should embrace. The advent of tokenization and artificial intelligence (AI) will make the entire capital raising, investor engagement, securities management, and secondary trading all more efficient and less costly. AI will also make processes like filing qualification and founder review simpler and faster for regulators (Suptech/Regtech). The SEC should be doing this now.
As the current administration is supportive of small business and entrepreneurship now is the time to move and improve.
Editors Note: Let us know if you want to add a recommendation, or if you disagree with something. Email: JD@crowdfundinsider.com