Earlier this month, the SEC proposed long-awaited rule changes to Regulation CF. Reg CF (the CF stands for crowdfunding) governs how everyday investors can invest in startups – and how startups raise money through certain SEC-registered investment platforms.
The industry has been asking the SEC to make some of these changes for years. And these changes have the potential to reshape the startup investing landscape. They can also be a source of major confusion. Even well-written SEC regulations can be tough to understand. So we asked our friends at Republic to help us better understand what the SEC is proposing.
Republic is one of our favorite startup investment platforms. The Republic team devotes a lot of time and energy to working with regulators – especially those at the SEC. Republic was in the room with the SEC talking about these changes two weeks before they were published. It also met with the SEC the day after the proposed rule changes were published.
We asked our friends at Republic several questions about the proposed changes via email. Their responses, below, have been lightly edited for clarity.
What changes are the SEC proposing for Reg CF raises?
The SEC is proposing a number of changes:
a. The amount a startup can raise in a 12-month period would be increased from $1.07 million to $5 million.
b. The limits on the amount of money accredited investors can invest in any Reg CF offering (or any deal) would be eliminated, providing the funding portal takes reasonable steps to verify the investor’s accreditation status. (Individuals must demonstrate they have made $200,000 a year for the last two years. Households must show they have made $300,000 a year for the last two years.)
c. Nonaccredited investors would have their investment limit based on the higher of either their net worth or their income. That would raise the investment limits across the board. The current rule calculates investment limits based on the lower of the two.
d. Startups that want to raise money would be able to test the waters, allowing them to see if there is interest in a Reg CF campaign before committing to the legal and financial work to prepare for a fundraising campaign.
e. Arcane advertising rules that make marketing difficult would be eliminated.
f. Bad actor disqualification would extend to a 10-year look-back period for most things, rather than being triggered by whether the act took place before 2016 (this increases the universe of founders that can raise money for their startups).
g. Special purpose vehicles (SPVs) would now be permissible to act as investment vehicles for investors to invest into instead of directly into the issuing company (but the proposal isn’t economically or practically feasible).
Which proposed change do you think is the most significant?
Raising the cap on how much capital startups can raise to $5 million is the most important change. It makes crowdfunding more appealing to bigger companies with devoted user bases looking to raise capital. Many of …read more
Source:: Investment You