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Today, the Securities and Exchange Commission (also known as the SEC) made an important announcement that stands to unquestionably improve regulated startup and private investing. Most significantly, the SEC will increase the maximum amount that can be raised through a Regulation Crowdfunding campaign from $1.07 million in any twelve-month period to $5 million--a nearly five-fold increase.
It will also increase the 12-month fundraising limit on Regulation A+ from $50 million to $75 million, and increase individual’s investment limits in some cases. The changes will take effect in 2021.
Why are we so excited about these changes?
As you probably know, one of the best predictors of a company’s success is access to capital. And historically, it’s been much harder for small companies to raise capital than it has been for larger companies. (Think of how much easier it is for a giant corporation to issue hundreds of millions of dollars in stock or corporate bonds than it is for most small businesses and startups to raise a few million dollars.)
To correct some of this inequity, the JOBS Act was passed in 2016 to make it easier for private companies to raise capital directly from individual investors (legally known as Regulation Crowdfunding.) This ruling laid the foundation for the investment crowdfunding industry as we know it today. Since the passage of that law, private companies have used Regulation Crowdfunding to raise over $500 million in capital from individual investors. Companies using a slightly different exemption created by the same legislation, Regulation A+, have raised billions, including more than $1 billion in 2019 alone.
$1 million wasn’t enough
Despite the increasing popularity of crowdfunding, the $1,070,000 annual cap on Reg CF has deterred companies and projects looking to raise more than $1 million — which is most companies. Today’s announcement is such a game-changer because it makes crowdfunding more attractive to many more companies. The SEC acknowledged this by saying, “We believe that the amendments adopted in this release will enable small businesses generally to access capital through exempt offerings more effectively and we encourage further specific, tangible suggestions for action by the [SEC] and are committed to continued engagement on this topic.”
Startups, and other projects, like real estate, can do a lot more with $5 million vs the old cap of just over $1 million. This change is likely to attract more quality issuers and therefore potentially lower the risk profile of the companies and projects seeking to raise under this exemption. That means that individual investors, in turn, will have access to a larger universe of direct investment opportunities.
Here’s how the Republic's Deputy General Counsel Maxwell Rich described the importance of today’s announcement:
"Today's approval of the Harmonization Rules will be remembered as the long-awaited and needed fuel to the reg-crowdfunding engine. Republic would like to thank the Commission for their efforts in meeting with, listening to, and addressing the needs of private companies and the intermediaries that serve them. We are extremely optimistic about what raising offering limits, liberalizing investor investment limits, and rationalizing communication rules will do for this industry. Republic encourages companies who previously believed Reg CF or Reg A+ were too limited for their capital requirements to take a second look.”
The importance of these changes cannot be overstated, particularly the increased limit for Reg CF deals. The increase to $5 million is large enough to allow a startup to raise a full Series A funding round, to provide all the equity required for a sizable real estate development project, or to buy a museum-quality piece of art. In our estimation, these changes will increase the total addressable universe of companies from billions to trillions in total value, creating an enormous opportunity for the platforms poised to facilitate this investment.
At Republic, we’ve built the distribution, technology and compliance infrastructure needed to power the private investment industry, and so we’re ready to tackle these new, larger raises. Today’s announcement marks the beginning of a new era for private investing, and we’re excited to be at the center of it all.
Gratitude for the SEC and our own team
The team here at Republic has participated in the discussions leading up to this announcement for a while and is extremely grateful to the SEC for their efforts and foresight.
Republic’s own in-house team, including CEO Kendrick Nguyen, CEO of public fundraising Chuck Pettid, and Maxwell Rich, have been instrumental in working with the SEC to consider improvements in order to better serve private companies and individual investors. In fact, Republic, either directly, or with a letter it co-authored, is cited over 20 times in the Final Rules release.
We are also thankful for the support and collaboration of the Association of Online Investment Platforms (AOIP).
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