This month, the Securities Exchange Commission enacted significant revisions to regulations stemming from the 2012 JOBS Act. The Commission’s objective was to create consistency across the guidelines governing exemptions for equity crowdfunding, Regulation D, and Regulation A+ offerings. These adjustments represent substantial progress for both emerging businesses and those who invest in them.

I have been closely following this area since the launch of Indiegogo in 2008 and Vincent earlier this year. I dedicated four years to collaborating with the Obama administration, the SEC, and FINRA to facilitate the passage of the JOBS Act in 2012. Following that, an additional four years were spent refining the rules with the SEC and FINRA before equity crowdfunding became operational in May 2016. At Indiegogo, we partnered with numerous organizations, successfully funding almost 150 businesses through equity crowdfunding within a couple of years.

Those involved in the development of these regulations understood that the initial rules for equity crowdfunding in 2016 were preliminary. We were navigating uncharted territory, balancing potential risks with existing regulations, and striving for greater accessibility for both investors and entrepreneurs. Now, the time for crowdfunding has arrived, and I recognize the contributions of all parties involved – regulators, lawmakers, startups, and investors – who collectively advanced this ecosystem to its current stage.

However, even with these advancements, equity crowdfunding is not without its limitations. There are restrictions on the amount of capital that can be raised, the methods of communication permitted, and the extent of required documentation. In practice, the process closely resembles seeking funding from pre-seed or seed investors, or is comparable to a traditional product crowdfunding campaign. Ultimately, it is a functional system.

The SEC has implemented several key changes to the regulations, and it is beneficial to examine each one individually. Instead of considering them broadly, here are some important points for entrepreneurs to note.

• Regulation Crowdfunding (Reg CF) represents the foundational equity crowdfunding method for companies. The maximum amount companies can raise from investors has been increased to $5 million, a rise from the previous limit of $1.07 million. Participation is open to all investors.
• Regulation D, Rule 504 (Reg D) is another form of equity crowdfunding, available only to accredited investors. The new regulations raise its maximum funding cap to $10 million, up from $5 million.
• Regulation A+, Tier II (Reg A+), designed for more established companies, now allows for fundraising of up to $75 million through equity crowdfunding, an increase from the current $50 million. This is a significant development, providing established companies with the potential to secure substantial capital. Participation is open to all investors.
• A “test the waters” provision now allows companies to create platforms similar to Indiegogo, enabling them to share information with potential investors before formally launching a fundraising campaign. This feature was previously available for Reg A+ but is now extended to Reg CF.
• Demo day communications will generally no longer be considered general solicitation.
• Reg CF and A+ offerings can utilize special purpose vehicles (SPVs) to consolidate their investor base into a single entry on a capitalization table.
• Reg CF fundraising cycles can now occur every 30 days, a reduction from the previous 180-day interval.

To provide a clearer assessment of these changes, I have evaluated each specific point and assigned a letter grade based on its anticipated impact on emerging entrepreneurs. While many of the rules received an A grade or higher, some areas still require improvement. As we enter a new administration and a new year, the success or failure of crowdfunding initiatives may hinge on these seemingly minor adjustments.

1. Regulation Crowdfunding (Reg CF) limit increase

This revision represents a substantial development. A frequent concern voiced by business owners investigating Reg CF centered on the expenses involved in conducting a fundraising campaign. Considering expenses for financial services, legal counsel, and platform usage, companies could anticipate initial costs exceeding $100,000. These costs, alongside the time commitment, effort, and supplementary marketing expenditures, accumulate to a considerable sum, especially with a fundraising ceiling of $1 million. In many instances, these expenses outweighed the benefits when contrasted with securing funding from a limited number of angel investors. However, with a $5 million cap, the financial advantages of raising capital through this method are considerably enhanced. Furthermore, $5 million represents a significant amount of capital, often beyond the capacity of a small group of angel investors to provide.

2. Regulation A+ Tier II limit increase

The adjustment to the fundraising ceiling is a positive development, though not a particularly significant one. Reg A+ offerings infrequently reach the prior $50 million limit, and the cap itself is seldom a primary consideration for companies evaluating this fundraising route. While an increased limit is welcome, the practical impact remains limited.

3. Reg D (Rule 504) limit increase

This change mirrors the benefits seen with Reg A+ in that it represents a positive step forward for companies utilizing Regulation D. Previously, the fundraising cap under Reg D Rule 504 stood at $5 million. The revised regulations now permit a maximum raise of $10 million, effectively doubling the available capital. This increase is a substantial improvement and provides a meaningful difference for businesses seeking funding.

4. ‘Test the waters’ for Reg CF

This development is highly beneficial. As previously noted, conducting a Regulation Crowdfunding (Reg CF) campaign can involve significant expenses. The ability to assess investor demand without incurring the full costs and workload of a complete offering is a substantial advantage for businesses. This change also simplifies the process for companies considering a capital raise, which should lead to a greater volume of offerings being initiated. It is anticipated that 2021 will see a considerable increase in these preliminary investor engagement efforts.

5. Demo day communications for Reg CF

While a positive development, the change mainly affects businesses participating in incubator and accelerator programs, representing a limited segment of the broader startup landscape. Nevertheless, this update clarifies a previously ambiguous aspect of the prior regulations, which is beneficial in reducing ambiguity for companies.

6. Special purpose vehicles (SPVs) permitted for Reg CF and Reg A+

This represents a significant improvement. A major difficulty with the earlier regulations was the prohibition of SPVs, which required every investor to be listed individually on the cap table. This created substantial difficulties for companies attempting to handle communications, maintain compliance, and distribute documentation to numerous individual investors. Currently, all investors participating in Reg CF offerings can be grouped into a single SPV – shown as a single entity on the cap table. This streamlined approach offers considerable simplification and enhanced efficiency, marking a transformative change.

7. More Frequent Fundraising Opportunities (Reg CF)

While appearing minor, this adjustment represents a significant benefit. It enables business founders to structure funding in stages, which is advantageous for determining optimal pricing and building investor enthusiasm. For instance, a company might secure $2 million in funding at a specific valuation, then launch a subsequent $2 million offering at an increased valuation just 30 days later. It’s important to note that all fundraising activities must remain within the $5 million aggregate limit over a 12-month timeframe. Furthermore, this change facilitates a quicker transition between different regulatory exemptions. I anticipate increased discussion surrounding this particular update.

Final Considerations

The implementation of these guidelines is anticipated to begin in the coming year. Despite the continuous potential for refinement, the outlook for 2021 is promising. Individuals involved in the development of these rules for almost ten years might perceive this as a modest advancement.

However, considering a timeframe of five years, these modifications represent substantial progress. I am optimistic that these measures will accelerate the circulation of capital and broaden participation within the entrepreneurial and investment communities.