Perhaps the most dominant characteristic of Reg CF capital raises—and also the one which has until recently relegated the structure to the realm of niche, quasi-Kickstarter-dom—is a maximum offer size of $1.07 million.

But the SEC’s announcement promises to change all of that.

Reg CF 2.0 – In a $5 Million Stance & Ready to Dance
By far, the most interesting and disruptive change announced in the SEC’s March 4 press release is that the commission will be increasing the maximum offer limit for Reg CF raises from $1.07 million to $5.0 million. Until now, the very lean cap raise limit for Reg CF geared it primarily toward issuers just past the “friends and family” investment stage (again, unless running a concurrent Reg D raise). A limit of $1.07 million just doesn’t make much sense for most companies with any degree of track record and/or momentum needing capital to grow.

And at the same time that limit pretty dramatically narrowed the universe of potential issuers able to utilize Reg CF, it also assured that many institutional investors would steer clear, with $1.07 million falling below the minimum investment levels for many entities. Again, there is the concurrent Reg D workaround, but that dynamic is rather clunky and inefficient.

The SEC is also making it easier for investors to individually put more capital to work under the Reg CF structure. The calculation for the individual investment cap for non-accredited investors is being flipped to being contingent on the greater of annual income or net worth (again, the old scheme uses the lesser of the two numbers for the calculation). Moreover, for accredited investors the hard cap of $107,000 per investor per year is being eliminated entirely.

An additional benefit will be that prospective Reg CF issuers will now be permitted to “test the waters” via communication with institutions regarding their cap raise prior to filing, in order to assess the degree of interest. This was previously an option available to Reg A/A+ filers, but not CF, so the move appears to be yet another effort to “legitimize” CF and propel it into the big leagues.

All told and in spite of their existing limitations, Reg CF raises have already seen a significant uptick in activity since launch, rising from $27.6 million in capital raised using the offering structure in 2016  to approximately $137 million as of last year , thus proving the strong market appetite for this sort of structure and providing a glidepath for expansion.

With these new changes, the true potential of the Reg CF structure should be fully realized, making it—for the right sized issuer at least—much like what the limited liability company (LLC) has become in the universe of corporate structuring: a hybrid taking the best aspects of two legacy structures, and ultimately superior to both of its parents.

Cap Table Capers
One other comparatively niche change is also in the works. Previously, investors were prohibited from using special purpose vehicles (SPVs for short) to aggregate capital for deployment in Reg A or Reg CF offerings. The new proposed rules are intended to eliminate that restriction..

Want to roll some accredited investors up into a SPV to take a consolidated chunk of a Reg CF or A cap raise? Soon you should be able to do that.