Finally, change for the better is officially afoot in the world of private placements. With the world engulfed in the COVID-19 pandemic, this exciting regulatory policy shift comes not only as a much-needed opportunity for the little guy, but could prove to be a significant driver of America’s economic recovery, as well.

On March 4, the SEC proposed sweeping changes to several rules covering private capital raise registration and regulation exemptions, in an effort to “provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections.”

Historically the go-to mechanism for most larger, institution and high net worth-focused capital raises is either Reg D 506b or 506c. Reg D will see only minor adjustments. The other expected changes will be to Reg A+, where the maximum annual cap raise limit will increase 50%, from $50 million to $75 million and secondary shareholder participation will also increase 50%, from $15 million to $22.5 million.

Big Change 
The most extensive proposed changes however lie within the rules governing Regulation Crowdfunding (Reg CF for short). The Reg CF exemption has—until now—been effectively useless for raising capital due to the $1.07mm cap. Frankly, Reg CF was considered a joke that only a small niche of companies ever utilized, tainted as a trivial way to raise capital. Philosophically, Reg CF has been more akin to a Kickstarter or GoFundMe campaign than to a mainstream method to raise growth capital.

With the envisioned Reg CF changes, the private capital universe will experience a positive shockwave for early stage issuers at the Seed and Series A capitalization round levels.

Democratization of Private Investment
Reg CF is the progeny of the 2012 JOBS Act, with the governing rules not taking effect until four years later in 2016. The act sought to create a mechanism for regular, non-accredited (i.e., for lack of better shorthand, “not wealthy”) investors to participate to a greater degree in private capital markets. Additionally, the SEC recognized the difficulty start-ups and early stage companies had accessing capital markets relative to their larger peers. Reg D offerings are only available to accredited investors and institutions often unwilling to take a chance on unproven companies, and frequently involve significant fundraising costs. Meanwhile, Reg A raises are burdened by onerous filing and disclosure requirements often making that type of offering equally unsuitable.

From these policy interests, Reg CF was born—an exemption featuring both the ability to attract capital from regular, non-accredited investors like a Reg A offering, as well as a fairly streamlined filing process more akin to Reg D, with no SEC review of the offering. Liquidity characteristics of Reg CF are similarly a hybrid between Reg D’s general illiquidity and Reg A’s free tradability, with shares largely locked up for the first year, but subsequently liquid.

Because of the dual perception of the lower degree of sophistication of Reg CF investors, and an associated greater risk of fraud in combining this investor pool with small, comparatively speculative capital raises, the SEC imposed certain limitations on these kinds of deals.

Reg CF raises must either take place on specially registered and regulated “funding portals”, which are in turn mandated to serve in a financial educational capacity for their investor members, or be orchestrated by licensed broker-dealers (some portals are also broker-dealers). Issuers are required to make financial statements available to investors, and to file offering materials with the SEC. Subject to additional limitations and more stringently than either Reg D or Reg A placements, only US-based companies not already registered with the SEC are eligible.

Individuals are limited in regard to the amount of money they can invest in Reg CF offerings each year. Investors can deploy the lesser of 5% of net worth or income each year if either is less than $107,000, or the lesser of 10% if both are equal to or greater than $107,000, capping out at a maximum Reg CF investment ceiling of $107,000 per year. Even accredited investors are subject to this cap, although the ability of issuers to run a concurrent Reg D offering provides a de facto relief valve there. Additionally, investments are cancelable and fully refundable during the bulk of the time the raise is under way, and subsequent material changes to the raise result in automatic refunds to investors unless they reaffirm their commitment.

First « 1 2 3 » Next