In March 2020, the Securities and Exchange Commission (SEC) announced amendments to crowdfunding rules. The current rules are complex and confusing. They have been pieced together over a decade and include ten exemptions, each with its own set of rules.
Regulation Crowdfunding and other online crowdfunding rules grew out of the Jobs Act of 2012, and the intent was to move online crowdfunding for donations to crowdfunding for investment. Since its beginnings in 2016, Regulation Crowdfunding had raised more than $300M through 2019 and grew by nearly 59 percent in the last year alone.
Regulation Crowdfunding is the rule that lets anyone over the age of 18 invest. Under the existing rule severe limits are imposed on how much each person can invest and how much each company can raise. The intention is to protect investors against unscrupulous entrepreneurs. But because each investor can only invest a small amount, it has been difficult to raise money for either a business or a building since it requires so many investors to participate. This has been the real stumbling block for the use of Regulation Crowdfunding in capital raising.
With the proposed updates, limits for non-accredited investors will change from a “lesser of net worth or income” standard to a “greater of net worth or income” and limits will be removed on how much accredited investors can invest completely, and this may have the greatest impact. Companies will also see the benefits of the proposed updates. They will be able to raise up to $5 million per year, instead of the $1.07 million cap imposed today.
Simplification and improvement of this exempt offering framework will take investment another step closer to democratization. Start-ups and small companies will find it easier to raise the capital they need, while protections for the investor will be preserved. And Regulation Crowdfunding will finally be able to fulfil its promise. After all, emerging businesses and entrepreneurs raise capital with this framework – everything from seed capital for new business, growth capital for established companies and equity for real estate projects – and the investments that every-day Americans make through crowdfunding help to catalyse ideas, grow jobs and stimulate the economy. Mark Roderick, one of the leading crowdfunding and fintech lawyers in the country, applauds the SEC proposals and believes the changes will give funding portals (the platforms permitted to offer Regulation Crowdfunding) the ability to make money. “The impact on the Crowdfunding industry could be profound, leading to greater compliance, sounder business practices, and fewer gimmicks.”
To learn more listen to my interview with Mark Roderick.
Image by Eve Picker