On November 2nd, 2020 in a close vote of three to two, the Securities and Exchange Commission (SEC) approved a set of amendments to “simplify, harmonize and improve” certain aspects of securities exemptions rules that small and medium businesses and startups use to raise capital from the public.
Among the securities exemptions impacted, Regulation Crowdfunding (Reg CF) had a few important changes that couldn’t come at a more timely manner: when more and more of our nation’s small and medium businesses are in need of affordable and innovative ways to raise capital to support their businesses through the Coronavirus pandemic.
For business owners looking at Regulation Crowdfunding as an option, these new rules mean:
- You can raise more money through Reg CF - up to $5 million.
- It should be easier to raise money - more investors, including financial institutions, will now be eligible to invest, and many investors are now allowed to invest more money than before.
- It will be easier to set up your Reg CF offering - if you’re raising less than $250,000, there are fewer requirements, such as a financial review, to get started.
For investors, your investment limits will likely be changing March 15:
Non-accredited investors limits are calculated as follows:
- For income or net worth of less than $107,000: The greater of $2,200 or 5% of the greater of the annual income or net worth of such investor, not to exceed a maximum aggregate amount sold of $107,000.
- For income or net worth of $107,000 or more: 10% of the greater of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $107,000.
Accredited investors will no longer have an investment limit.
- An accredited investor is defined as having an annual income exceeding $200,000 ($300,000 for joint income) for the last two years or a net worth, excluding your primary residence, exceeding $1 million.
Overall, the amendments’ goals are to reduce friction for issuers moving from one exemption to another, increase the amount an issuer can raise in an offering, amend investor eligibility rules, provide clarity to issuers and investors regarding investor communications, and amend what issuers need to disclose and what makes them eligible for exempt offerings. The changes will better align the requirements across different exemptions while enhancing investor protections.
Here are the Regulation Crowdfunding Amendments as highlighted by the SEC:
- Raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million
- Amend the investment limits for investors in Regulation Crowdfunding offerings by:
- Removing investment limits for accredited investors; and
- Using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors
- Extend for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period
- Permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A
- Establish rules that permit the use of certain special purpose vehicles that function as a conduit for investors to facilitate investing in Regulation Crowdfunding issuers
The extension of the temporary Regulation Crowdfunding provisions are effective now, and all other amendments will take effect March 15, 2021.
At the SMBX, we’re excited about what this news means for small and medium business owners across the U.S., especially during the current crisis. For so many businesses pivoting their business models to survive changes the pandemic has wrought, access to low cost capital is critical. These changes from the SEC will lower barriers to that capital and streamline the process for entrepreneurs.
Business owners interested in raising capital through Regulation Crowdfunding, please get in contact to see how the SMBX can help. And for investors looking to support their local businesses while earning a return, check out the SMBX’s available offerings here.