Equity crowdfunding grows up with new $5 million limit on ‘Reg CF’ offerings

ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Nov. 3 – Businesses from microbreweries to football clubs to electric vehicle makers and ‘mom & pop’ shops have made use of Regulation Crowdfunding under the JOBS Act, which created pathways for small and mid-sized businesses to “crowdfund” capital from everyday investors. Now, the Securities & Exchange Commission has approved amendments that increase the offering limit from $1.07 million to $5 million.

The amendments “open significant new opportunities for businesses to use this capital to recover from the current economic crisis or launch innovative new products and services,” said Jason Best of Crowdfund Capital Advisors.

Since ‘Reg CF’ went into effect in 2016, more than 2,800 companies in 50 states have raised over $500 million dollars. Concerns about fraud have largely proven unwarranted, paving the way for the S.E.C.’s changes. The amendments will go into effect 60 days after they are published in the Federal Register.

Other changes include the ability to pool individual investors into ‘special purpose vehicles’ to simplify cap tables, the ability to “test the waters” with investors, and clarification around rues for participating in demo days while engaged in a capital raise.

Bigger sums

Offering limits were also raised for other provisions of the JOBS Act. Companies employing rule 504 of Regulation D, often used for intrastate and regional offerings, can now raise $10 million, up from $5 million. Companies using the “mini-IPO” process under Regulation A can now raise up to $75 million, up from $50 million. TerraCycle, which recycles hard-to-reuse materials for major consumer brands, for example, raised more than $6.7 million using the exemption.

Impact offerings

Crowdfund Capital Advisors reports that at least a quarter of recent ‘Reg CF’ offerings have been from women- and minority-led teams. Impact-oriented businesses have been making use of crowdfunding portals such as WeFunder, Republic and StartEngine. New entrants such as Raise Green and WaterWorks are focused on impact sectors.

Grassroots platforms are not waiting for Washington to invest in a green new deal

Eve Picker of real estate crowdfunding site Small Change tells ImpactAlpha the higher limits will help establish “an alternative financing source for these projects that more often than not hold no interest for traditional financial institutions.” Projects on Small Change have included tiny homes, energy efficient affordable housing, and transit-oriented development, many led by women or people of color.

Covid recovery

Crowdfund Capital Advisors is advocating for a $20 billion “Main Street Recovery Co-Investment Fund” financed with unused federal Covid relief funding. The proposed fund would match individuals’ investments in businesses struggling to survive the pandemic.

Accredited investors

The S.E.C. in August expanded its “accredited investor” definition, which defines who may invest in many private investments. The new definition recognizes investors’ “sophistication” in addition to their financial resources.  In: financial professionals such as broker-dealers and investment advisers; family offices and entities including funds, Indian tribes and governmental bodies with more than $5 million in assets. Spousal equivalents may also now pool assets to meet the accredited investor criteria.