The 2021 New SEC Crowdfunding Rules Are Here!
I have to say, now that the new SEC crowdfunding Rules are here, things are going to get a lot more interesting.
Don’t get me wrong; crowdfunding is already interesting. It’s been growing dramatically in sheer investment numbers and popularity thanks to the JOBS Act and the slow but steady realization that even the average Joe can now invest in startups like the big players.
Even with the JOBS Act, many of the limits imposed have kept some deals out of the average investor’s hands. What has me excited is that I believe the changes that went live today will supercharge the industry and bring better deals to the table.
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Table of Contents
Let’s see what the changes are and how they will affect deals moving forward…
Why Has The SEC Decided To Modify Some Of The Crowdfunding Rules?
I’ll be the first to agree that the government doesn’t always act the way I think it should. I may disagree with policies, question my representative’s motives, and so on, but the part that really gets me sometimes is that I feel like they have their own agenda and aren’t making choices to benefit the people they serve. That’s why I was amazed when I heard that they were looking to adopt changes that actually made sense.
The government isn’t a bad entity; there are just many politics and back-door deals that muddy the waters. Representative A tells Representative B, “I’ll back your bill if you add this totally unrelated clause.”, etc. Anyway, I’m getting off-topic.
The SEC rules are there to protect people from themselves for the most part. The idea behind them is to keep people who don’t have the means from risking so much that they can no longer support themselves should that investment fail to produce sufficient returns. To that end, the rules are more of a living, breathing document.
Over time the SEC reviews the current rules, assesses their impact, solicits feedback from all parties involved in the investment process (issuers, portals, investors, etc.), and recommends changes. Usually, there’s a comment period where everyone can chime in on the proposed changes. Once the process is complete, if additions or other changes are recommended, they are adopted, published, and then become law after a period of time.
The JOBS Act has been around for several years. Now that there has been sufficient time to see how the old rules have held up, the SEC has the data it needs to fine-tune those rules. Let’s take a look at the new rules…
Changes To Reg CF
Reg CF is the one that average investors know best. It’s the regulation that most raises you see on the crowdfunding platforms use. The main reason is that it’s simple and cost-effective for the issuer.
Until now, Reg CF raises were limited to $1,070,000 in a 12-month period. Many viewed this as quite limiting because a $1M raise isn’t that much money for a growing company.
Today (March 15th, 2021), the limit has been raised to $5,000,000 in a 12-month period. This change will bring more opportunities to crowdfunding platforms.
Now, instead of waiting for the right time or filing for raise under a different regulation, companies who needed more than $1M and up to $5M have an easy, cost-effective option, and investors will now have more opportunities to select from.
In fact, M.C. Squares has already taken advantage of the new limits and became the first company to launch a Reg CF raise under the new rules! I expect many more to follow.
The SEC didn’t stop there. Reg CF wasn’t the only regulation change…
Reg A+ Changes
You might think that $5M is a lot of many, and for many companies, it is. That said, there are bigger fish in the sea, and they need more food to grow. Welcome to Reg A+!
Reg A+ also received a boost to their raise limit. Before today, Reg A+ raises were limited to $50M in a 12-month period. Now they can raise up to 50% more for a total of $75M.
Like in the Reg CF pool, some companies think the $50M limit is too small. The larger raise limits that went live today will attract bigger fish into the Reg A+ pool.
These are positive changes for investors and issuers alike, but wait, there’s more…
Changes To Investor Limits
Accredited Investors
There is no longer a limit on how much accredited investors can invest in Reg CF offerings. Although this is good news, I suspect most accredited investors tend to hit the larger raise companies in general and focus on Reg A+ and so on.
Non-Accredited Investors
Reg CF
Yes, even the average Joe investor gets to see increases on their end!
Along with the changes to the max raise limits for companies, investors themselves get a little boost.
Now, instead of being limited to $2,200 or using the lesser of either your net worth or annual income to calculate your investment limit, non-accredited investors can use the greater of the two.
The percentages change depending on your annual income or net worth. If either your net worth or annual income is less than $107,000, you are limited to the 5% calculation. If both are $107,000 or higher, you can use the 10% calculation.
5% Calculation Example:
If your net worth is $105,000 and your annual income is $30,000, you would be limited to 5% of the lesser amount of $30,000 or $2,200 (whichever is greater). 5% of $30,000 is $1,500, so the higher $2,200 would be your cap.
Under the new rule, using the same amounts, you would be limited to 5% of the greater amount of $105,000 or $2,200 (whichever is greater). 5% of 105,000 is $5,250. That’s a big change from $2,200!
The percentages change depending on your annual income or net worth. If either your net worth or annual income is less than $107,000, you are limited to the 5% calculation. If both are $107,000 or higher, you can use the 10% calculation.
10% Calculation Example:
An investor with a $100,000 annual income and a $500,000 net worth would be limited to an investment cap of $10,000 per year (10% of the lesser of the two).
The new rule changes that to $50,000 per year (10% of the greater of the two).
Reg A+
Reg A+ Tier 2 is limited to 10% of the greater of your annual income or net worth.
This is great news for non-accredited investors!
New SEC Crowdfunding Rules Conclusion
Now that the new SEC crowdfunding rules are here, I expect to see the crowdfunding market explode with new opportunities and fresh money from new investors. I’m excited and can’t wait to see what comes from this.
With higher limits on both the issuer and investor side, it’s a win-win. I actually feel like the SEC not only listened but took notes.
I will be updating the Investment Policy Creation Tool to reflect these changes. I will also be creating an investment limit calculator tool to help people figure out how much they can invest.
So, what do you think of these changes? Do you welcome them, or are they too much? Maybe they’re not enough… What other changes did you want to see? Let me know by commenting below.
Thank you,
Thanks for bringing us this updated rules on crowd funding. It is sometimes hard to wade through new legislation to find the relevant parts, so it is appreciated that you have done this for us.
It is good to see that the changes are advantageous.
As you say $1m may seem a lot of money, but to set up any size of operation whatsoever, it is a drop in the ocean. While we all must carry out our due diligence and the increase does increase the risk considerably, it also makes it possible for larger operations to get going quicker, who will then succeed faster and therefore there will be a quicker return on investment.
Exactly. What I like the most is that the larger limits should bring in new blood (so-to-speak). The companies that found the $1M cap to be too small leading them to raise through other means out of the average investor’s reach.
Thanks for taking the time to comment!
When I see a title regarding changes in regulations my mind automatically thinks, “How are my freedoms diminishing now?” It’s refreshing to find that our abilities to invest and be invested in have actually increased. I like that it is moving in the right direction. While my business has not reached a point where this type of funding would be helpful it’s good to know that options are improving.
So true, that’s kind of why I went off on my whole government speech. It was refreshing to see that they actually listened and made changes for the better.
When your company reaches a point where it needs a cash infusion to expand or whatnot, look at the crowdfunding options.