Crowdfunding evangelists are asking the Securities and Exchange Commission to consider raising the investment cap under Regulation Crowdfunding from $1 million to $20 million.
The letter follows an online conversation between SEC Chairman Jay Clayton and FINRA President and CEO Robert Cook. “I continue to worry that retail investors do not have access to as broad a slice of our capital markets as I would like them to have,” Clayton said. “You have private capital and public capital. Retail investors can really only participate in the public capital, and to the extent private capital has become so robust, you’ve shrunk opportunities.”
“That bothers me a bit,” he added. “If that trend continues, a much more select group is participating in the growth of the economy.”
The letter was signed by: Sherwood Neiss of Crowdfund Capital Advisors; Doug Ellenoff of Ellenoff Grossman & Schole; Youngro Lee, CEO of NextSeed; Tyler Gray, COO of Microventures; James Dowd, managing director of North Capital, Kendrick Nguyen, CEO of Republic; Ryan Feit, CEO of SeedInvest; Karen Kerrigan of the Small Business and Entrepreneurship Council; Ron Miller, CEO of StartEngine; and Nick Tommarello CEO of Wefunder.
In October 2015, the SEC approved Regulation Crowdfunding, making good on a JOBS Act mandate to permit startups and small businesses to raise capital by offering and selling securities through crowdfunding.
Crowdfunding, although common on Websites like Kickstarter, has not involved the offer of a share in any financial returns or profits from business activities. Doing so currently triggers the application of the full suite of federal securities laws, both for the issuers making the offerings and the brokers who intermediate them.
The approved framework established guidelines for investors and rules for issuers that want to raise up to $1 million a year through crowdfunding and not have to register those publicly offered securities. Whereas private companies are limited to seeking out accredited investors (with a net worth of $1 million or an individual annual income of more than $200,000), crowdfunded ones could reach out to the unaccredited. They would not need to register those securities offerings with the SEC, but will need to meet a variety of requirements.
All offerings must be facilitated through an intermediary, defined as either a registered broker-dealer or an online, registered funding portal, in compliance with anti-money laundering controls and privacy requirements, and registered with the SEC and FINRA.
In their letter, crowdfunding proponents make the case that more than 1,000 companies have filed with the SEC to raise money on online platforms designed to facilitate capital formation.
More than $137 million has been committed to these issuers; 95 percent of that capital was funded and invested into 715 companies. The letter notes that these 715 companies are supporting 4,172 jobs and producing more than $249 million in revenue.
The letter argues that the cap should be adjusted because:
There has been no fraud, and retail investors, “for the first time in recent history have a transparent, systematic way to back companies they believe in.”
The initial cap of $1million was meant to be adjusted. Only once since the launch of Regulation Crowdfunding has it been adjusted, at the time only by $70,000. “Such de minimus adjustments do not fully allow meritorious issuers to fully benefit from this new form of online finance,” the proponents say.
The current $1 million level “is now far below what startups and SMEs [small and medium-sized enterprises] need for seed-stage capital,” the letter argues. May 2018 data, they say, indicates that the median-sized funding round for Angel or Seed stage companies in the United States is $2 million.
Many companies forego Regulation Crowdfunding in favor of Reg D, 506(c), because of the former’s low limit. This has the effect of reduced disclosure to investors, since Form D provides less information even than Form C.
Both the United Kingdom and Germany have adjusted their caps to the equivalent of $8 million. “The United States should not be a follower but a leader,” proponents say.
“Raising the cap will allow issuers that wish to utilize this form of online finance the ability to raise in excess of $1 million and tap their local investors without having to deal with the costly, time-consuming process of either filing a full prospectus with the SEC or spending hundreds of thousands of dollars on a private offering,” the letter says.