Startups looking to raise capital can now raise nearly five times more due to recent changes made by the Securities and Exchange Commission.
Among SEC's recent changes to Regulation Crowdfunding, or equity crowdfunding, startups can raise up to $5 million in a 12-month period, up from $1.07 million. This type of funding allows companies to raise capital from a large pool of customers, friends, family and investors via online funding portals while being exempt from more traditional SEC registration requirements.
"It will fundamentally shift how more mature startups go about raising money in the future," says Sherwood Neiss, principal at Denver-based Crowdfund Capital Advisors, LLC, a crowdfund investing advisory firm.
He said $1.07 million was helpful for early startups and Main Street businesses, but was limiting to more advanced mid-size startups in the $5 million to $25 million revenue range.
Increased limits also will lead to more startups coming online seeking funds, which will in turn lead to more investors, he says.
Neiss, who helped architect the framework for Regulation Crowdfunding made possible through the JOBS Act of 2012, believes the changes will especially help traditionally underfunded groups like women and minority entrepreneurs. The JOBS Act created new rules that increased access to capital by expanding the pool of investors beyond just high-net worth individuals.
Also notable as part of the SEC’s recent changes, Neiss says:
• Investment limits on what startups can raise from accredited investors were lifted;
• Investment limits for non-accredited investors are now based on the greater of their annual income or net worth (previously it was based on the lesser of their annual income/net worth); and,
• Issuers can now test the waters via certain communications to see if there is interest in their concept before filing a complete offering.
Regulation A+ crowdfunding
Separately, the amount of funds that could be raised through Regulation A+ crowdfunding, which is for more larger companies, increased from $50 million to $75 million, says Neil Kaufman, managing partner at Hauppauge-based Kaufman McGowan PLLC, which advises clients on private placements and SEC filings.
Generally speaking Regulation A+ crowdfunding comes with more administrative and filing burdens than Reg CF, Kaufman says. He says he’s already filed a Regulation A+ offering for $75 million on behalf of a client looking to take advantage of increased limits.
He says he’s also gotten inquiries from startups looking to take advantage of the increased $5-million limit on Reg CF.
The increase "will significantly expand the number of companies that find Regulation Crowdfunding attractive" Kaufman adds.
Plainview company exploring options
Arnold Stillman, CEO of Plainview-based POEM Technology, a manufacturer of cloud-connected devices including oil tank monitoring devices, says he hadn’t traditionally considered Regulation Crowdfunding because he was always seeking more than the original $1.07 million limit.
The company is seeking growth and marketing capital presently and Stillman says with the limit being raised they may circle back to an investors club in New Rochelle that had offered to put together some interested crowdfunding sources.
He said POEM would consider Regulation Crowdfunding for smaller individual projects rather than for larger amounts of net operating capital since with this form of crowdfunding you’re typically dealing with a large pool of investors.
Limits, benefits to Reg CF
That’s something startups have to be mindful of, says Michael Lane, chairman of the Long Island Capital Alliance and CEO of Huntington-based SteriLux Systems, an early stage health care company that developed a sterilization locker for garments, shoes and personal items.
With Reg CF, companies could have hundreds to thousands of investors they'd need to communicate with, provide updates, answer questions, etc., he says, noting "there’s a management component to all that."
With that many investors and higher limits, Lane says, they also have to be careful how much of their company they’re giving away.
On the plus side, Reg CF does offer access to a broader number of investors, he says.
Still, Bob Brill, an accredited investor and a board member of the Long Island Angel Network, says to consider there‘s still value in bringing on angel investors or venture capitalists.
"Most startups can benefit from savvy investors like angels to help guide them," he says.
Conversely, with Reg CF you’re raising smaller amounts from a lot of people many of which many not be investment savvy, says Brill, also co-founder of Brooklyn-based Qunnect, a quantum communications device company and a board member/investor of Huntington-based eGifter.
But Reg CF does offer an alternative option for startups, which isn’t "a bad thing," he says.
The pandemic impacted Regulation Crowdfunding initially with total dollars invested at $8.3 million in March 2020, down from $12.3 million in January 2020, according to Crowdfund Capital Advisors (CCA), which tracks the 50-plus active online investment platforms. That’s since rebounded and grew to $70.2 million for March 2021.