SEC to Increase Regulation Crowdfunding Cap from $1 Million to $5 Million

We are excited to share with you today’s press release by the Securities and Exchange Commission with long awaited improvements to Regulation Crowdfunding as well as other exempt offerings. These changes should significantly increase the utilization of online finance in the United States over time.

In particular, we are thrilled that the years we have spent in Washington, DC advocating for changes and represented in letters and reports from the Treasury Department have resonated with the Commission. The changes outlined below will make the industry more appealing to issuers, allow the industry to scale and make online fundraising more efficient. Many thanks goes to the hard working people at the Commission.

Over the last 4 years, the data that CCA has collected on the industry has clearly shown that these offerings are conducted in a secure, efficient and nearly fraud-free market. This demonstrates the importance of a common data standard for the industry to enable transparency in the markets for regulators and investors. Other governments around the world should take note of these newly expanded rules as they contemplate their own opening of the private capital markets.

According to the press release, here are the highlights:

Offering and Investment Limits.  The Commission proposed revisions to the current offering and investment limits for certain exemptions.

For Regulation Crowdfunding: 

• raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
• amend the investment limits for investors in Regulation Crowdfunding offerings by:
  • not applying any investment limits to accredited investors; and
  • revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.

For Regulation A: 

• raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
• raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.

For Rule 504 of Regulation D: 

• raise the maximum offering amount from $5 million to $10 million.

“Test-the-Waters” and “Demo Day” Communications.  The Commission proposed several amendments relating to offering communications, including:

• a proposed new rule that would permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
• a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
• a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.

Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A.  These proposed rules would permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.

Crowdfunding Update – SEC Proposes Increasing Reg CF Cap to $5 Million!

We are excited to share with you today’s press release by the Securities and Exchange Commission with long awaited improvements to Regulation Crowdfunding as well as other exempt offerings. These changes should significantly increase the utilization of online finance in the United States over time. In particular, we are thrilled that the years we have spent in Washington, DC advocating for changes and represented in letters and reports from the Treasury Department have resonated with the Commission. The changes outlined below will make the industry more appealing to issuers, allow the industry to scale and make online fundraising more efficient. Many thanks goes to the hard working people at the Commission. Over the last 4 years, the data that CCA has collected on the industry has clearly shown that these offerings are conducted in a secure, efficient and nearly fraud-free market. This demonstrates the importance of a common data standard for the industry to enable transparency in the markets for regulators and investors. Other governments around the world should take note of these newly expanded rules as they contemplate their own opening of the private capital markets. According to the press release, here are the highlights: Offering and Investment Limits.  The Commission proposed revisions to the current offering and investment limits for certain exemptions. For Regulation Crowdfunding:  raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million; amend the investment limits for investors in Regulation Crowdfunding offerings by: not applying any investment limits to accredited investors; and revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest. For Regulation A:  raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million. For Rule 504 of Regulation D:  raise the maximum offering amount from $5 million to $10 million. “Test-the-Waters” and “Demo Day” Communications.  The Commission proposed several amendments relating to offering communications, including: a proposed new rule that would permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities; a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising. Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A.  These proposed rules would permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.

Crowdfunding Update – 2019 State of Regulation Crowdfunding

2017 State of Regulation Crowdfunding Report

The 2017 State of Regulation Crowdfunding –
U.S. Securities-based Crowdfunding Under
Title III of the JOBS Act[1]

Regulation Crowdfunding allows startups and SMEs to raise up to $1,070,000 per year from both retail and accredited investors by utilizing registered funding portals (or broker-dealers) to conduct exempt offerings online. This exemption requires issuers to file in a Form C and post online disclosures about a company’s operations, team, financials and other material information for investors to review. Regulation Crowdfunding started in the United States on May 16, 2016. The second calendar year for the industry ended on December 31, 2017. Because data about issuers, their financial wellbeing, and the capital that is committed is public information we can analyze the data and bring transparency to a segment of the markets (exempt private offerings) that has been fairly opaque until the JOBS Act went into effect.

Show me the CCLEAR Regulation Crowdfunding Dashboard

Key findings:

• The number of unique offerings increased 267%[2] from 178 in 2016 to 481 in 2017
• Proceeds increased 178% from $27.6 million in 2016 to $49.2 million in 2017. Total proceeds by the end of 2017 was $76.8 million
• The number of successful offerings increased 202% from 99 in 2016 to 200 in 2017
• The average success rate of offerings to date is 66.7%
• The total number of investors in Regulation Crowdfunding increased 158% from 28,180 in 2016 to 44,433 in 2017
• Issuers that filed annual reports and reported creating jobs created on average 13.9 jobs.
• Revenues for Issuers that filed annual reports increased on average 131% between the year in which they leveraged Regulation Crowdfunding and the Prior Fiscal Year.

Analysis:

• The results of this data show that the market, while still in its infancy, is growing at a rapid pace.
• The velocity of capital into funded offerings appears to be steady without showing signs of abnormal activity or irrational investor behavior.
• The rapid increase in the number of offerings and investors proves that there is appetite for Regulation Crowdfunding from both issuers seeking capital as well as investors looking to diversify.
• Given the high success rate for offerings, Regulation Crowdfunding represents a very structured yet viable alternative for access to capital for startups and SMEs.
  Given the ability for firms to leverage capital raised to scale operations and create jobs, Regulation Crowdfunding should be promoted by local Chambers as well as the Small Business Administration.
  Given the lack of irregularities or fraud, Regulation Crowdfunding (and the structure under which it provides for transparency), should be advocated by policy makers and government organizations.

Conclusion:
2017 represented a strong first complete calendar year for Regulation Crowdfunding. We expect the industry to exceed $100M in funded offerings during the first quarter of 2018. When considering the growth of securities-crowdfunding globally, we expect the market to reach $1B in funded offerings within the next 5 years. This can be further supported by making adjustments to the exemption that would allow for greater issuer caps.

In looking for how to consider the growth rate and size of this market over time, one can look at the UK market for data. With now 5 years of active equity crowdfunding in the UK, according to Cambridge University’s Center for Alternative Finance, in 2017, 17% of all seed stage capital in the UK came via equity crowdfunding. The CCLEAR database will continue to track these markets both domestically and globally as we begin to offer services to other regulators outside of the United States.

Download the full report here.

[1] This report is an excerpt of a report we wrote for the Securities and Exchange Commission (SEC) that summarizes the year end cumulative results for Title III of the JOBS Act (aka Regulation Crowdfunding)
Show me the CCLEAR Regulation Crowdfunding Dashboard

[2] Given Regulation Crowdfunding started on May 16, 2016, the first calendar year of Regulation Crowdfunding only encompasses 7 ½ months. Had it been a full calendar year, this growth percent would have likely been lower.

10 reasons the $1 million crowdfunding cap should be $20 million

The following is a piece we wrote for VentureBeat. The original can be found here.

10 reasons the $1 million crowdfunding cap should be raised to $20 million

It’s been18 months since the final rule of the JOBS Act went into effect, allowing equity crowdfunding. In those 18 months, everything proponents of the rule said would happen (and none of what the detractors said would happen) has become a reality. Over $82 million dollars of previously untapped capital from local investors has been committed to over 650 companies. No fraud has been perpetrated. And everyone (including investors, the Government, the Securities and Exchange Commission, and the media) has more insight into the private capital markets than has ever existed before, bringing a new level of transparency, accountability, and data analysis. This is the time to raise the maximum a company can raise from $1 million to $20 million.

Why? Entrepreneurs all across America are finally raising funds faster than they could through traditional channels. Investors now have a transparent and efficient way to support local businesses that they love and believe in by receiving information about these offerings online. Regulators have transparency into the private capital markets, an auditable trail of disclosures, and a digital footprint full of data. And our government has a jobs engine, a way to promote women- and minority-run businesses, an economic booster, and a tax engine. Not bad!

So if it’s working, why raise the cap to $20 million? Let me explain:

1. We can make it a bigger jobs engine. Data from companies that have been successful with an equity crowdfunding offering shows they hire on average 2.7 people within 90 days of a $300,000 raise. That’s about one job per every $100,000 raised. If we increase the cap to $20 million, that could equate to 200 new jobs for each issuer that raises $20 million. So raising the cap would make equity crowdfunding the Main Street jobs engine we expected it to be.

2. It will provide regulators with more transparency. Companies that raise money via equity crowdfunding file specific disclosures about their businesses, their operations, and their financial wellbeing. All of this is digitally recorded, and For the first time in 80 years, regulators can actually see where capital is flowing in the private capital markets, which can allow them to further protect investors. Increasing the limit to $20 million will attract larger firms that seek more capital down this public path. This means regulators AND investors will have real-time actionable visibility into a larger part of the private capital markets.

3. Startups can make a bigger impact. $1 million dollars is nice, but consider how much more a company can do with $20 million. Increasing the cap doesn’t mean every company would get $20 million (currently only about 50 percent of companies are successful with their campaigns and raise on average $300,000), but those that are worthy and can win over the support of the crowd can take on much greater goals.

4. Communities will get more engaged. Want to know how to engage local communities? Make them investors in the local businesses that are not just mom and pop shops but large employers and high-growth startups. They will have a vested stake in the performance of those companies, and by default these businesses will benefit from the marketing power of the community. Increasing the cap to $20 million gives local investors a greater stake in their local communities. Research shows that money invested locally circulates in the local economy rather than being sucked out.

5. We’ll see gender and minority benefits. Data my firm has been collecting proves that equity crowdfunding is democratizing access to capital among women- and minority-founded businesses. Increasing the cap to $20 million means more capital to this underserved group of founders.

6. Investors can diversify their portfolios. Increasing the cap to $20 million will give investors the ability to diversify more into their own communities. This doesn’t mean they should take all their investments out of the public markets, but why not put it into a local company that might be less likely to be impacted by fluctuating oil and commodity prices?

7. More data analytics. More data online means more opportunity to analyze it and present it to consumers of media. This data analytics can educate new issuers, give investors more opportunities to compare companies in similar industries and show our government where the greatest economic impact is taking place.

8. It will fix Title IV, Tier I of the JOBS Act. Title IV, Tier I allows companies to raise up to $20 million online from both retail and accredited investors but requires state review. Getting one state approval is slow and cumbersome. 50 is nearly impossible and insanely costly. Increasing the limit to $20 million will solve this problem and still provide state regulators information, disclosures, and data on all companies raising money from investors in their state.

9. It will allow the platforms to experience their true potential. Platforms are playing the role of intermediary incredibly well. As an extra benefit, they are acting as a vetting mechanism, only listing deals that meet minimum criteria and working to make sure issuers provide full and robust disclosures. Increasing the limit to $20 million will further enable these platforms to play this vital role and earn the fees to help support their operations.

10. Address the emerging blockchain/ICO nightmares. Let’s face it, there is a lot of uncertainty about blockchain and ICOs from regulators and Washington. This is particularly true given the amount of capital flowing through this unregulated industry. Increasing the cap to $20 million will allow ICO issuers that wish to sell security tokens on the blockchain a regulated process to follow. The emerging ICO marketplace would have an approved regulatory process to follow, giving blockchain startups the opportunity to sell their security tokens and give investors confidence that they aren’t risking their capital without some recourse.

Let’s not wait. The SEC should update the amount now or Congress should intervene to do so.

Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.

CCA Announces Availability Comprehensive Crowdfunding Database

CCLEAR Regulation Crowdfunding Database covering all Portals and Offerings

MIAMI, FLORIDA, OCTOBER 17, 2017 – Today at a Private Capital Markets forum, Crowdfund Capital Advisors (CCA) announced immediate availability of CCLEAR™, (http://www.CrowdfundCapitalAdvisors.com/data) to enable entrepreneurs, investors, policy-makers, educators, industry stakeholders and government leaders to immediately and transparently analyze all Regulation Crowdfunding offering data. The CCLEAR service can also be easily customized and implemented by securities regulators globally to monitor their private capital market activities.

“The CCLEAR solution is a revolutionary data analysis service that provides unique insights to investors and issuers. Until Title III of the JOBS Act went into effect, there had been no transparency into what is happening in the private capital markets,” said Sherwood Neiss, Principal at Crowdfund Capital Advisors. “Now with Regulation Crowdfunding there is a digital footprint of all private companies raising money online. With this unique data in the private capital markets, investors and regulators can immediately understand where capital is flowing by region, what industries benefit, where jobs are being created, what kind of economic impact is being delivered by city, state and region, where investors are from, where they are investing, the financial health of reporting companies, average valuations, average check size by portal, average raise by industry, average length of fundraising and much more.”

CCLEAR™ (standing for Collect, Clean, Aggregate and Report) is the first comprehensive securities-based crowdfunding database to collect, cleanse, aggregate and report on the underlying companies, portals and industries. CCLEAR uses a standards-based method and data structure (CCA Data Standards) for collecting over 153 static and transactional data points from Regulation Crowdfunding offerings. Crowdfunding websites can plug into CCLEAR via an API. Data is collected, cleansed and normalized then stored in cloud based servers and indexed for rapid response. The CCA Data Standards provides a taxonomy for use by public and private sectors and is promoted through marketplace collaboration.

There are 4 Dashboards available in CCLEAR. The Industry/Media Dashboard is free to registered users and visually displays summary information about the industry. The Investor Dashboard is subscription based, contains all-in-one detail on each offering with a live link to the campaign page, as well as industry analysis. The Regulator/Government Dashboard is subscription based, provides detailed information on all offerings as well as summary information about the entire industry. And the Portal Dashboard is free to Crowdfunding Platforms that plug into the database and provides industry comparisons as well as averages, trends and analysis.

CCLEAR has been in private beta for the past 6 months,” said Jason Best, Principal at Crowdfund Capital Advisors “during this time we’ve had a chance to work closely with our network of media, government leaders, platforms and investors to deliver them more than just data. CCLEAR delivers actionable information to benefit the decisions of all market participants. This type of data standardization tool will also accelerate the growth of the industry.”

Ellenoff Grossman and Schole, a law firm that advises issuers and portals, recently committed to deploying CCLEAR to all lawyers in its firm. “CCLEAR will further enable Ellenoff Grossman and Schole to speak to our clients about market evolution, where niche opportunities exist for portals and set expectations in data driven results way,” said Doug Ellenoff, Partner. “It is truly revolutionary to be able to see what is happening in a market that has had no sunlight for the past 80 years.”

Karen Kerrigan, President & CEO of the Small Business & Entrepreneurship Council said, “Access to capital is a perennial issue for America’s Small Businesses, as well as startup entrepreneurs. Now that we have a new avenue for entrepreneurs and their enterprises to seek capital from their friends, family and followers we need industry data to educate those companies on what they can realistically raise based on region of the country and industry sector. CCLEAR answers these questions for entrepreneurs and small businesses. It is a great tool that will help them succeed!”

CCLEAR Background
CCLEAR is a service created by successful entrepreneurs with Wall Street and Silicon Valley experience. Having raised millions of dollars in the private capital markets as well as crafting the Regulation Crowdfunding framework used in the JOBS Act, the team built a database and standard dataset that answers questions government regulators, policy makers, entrepreneurs and investors want to know about investing in private companies, raising capital online and spurring economic activity. CCLEAR is part of Crowdfund Capital Advisor’s commitment to deliver the latest tools to promote market credibility and efficiency. CCLEAR is available for immediately access at http://www.crowdfundcapitaladvisors.com/data.

About CCA
Founded in 2012, Crowdfund Capital Advisors is the worldwide leader in Securities-based Crowdfunding Policy, Research, Analysis and Data Analytics. The company offers highly customized services designed to assist governments, multilateral organizations, regulators, entrepreneurs and investors in understanding how to promote economies via regulated online securities exchanges. Clients include the World Bank, Inter-American Development Bank, country governments and global financial institutions.

CCA/World Bank Announce the Publication of Crowdfunding’s Potential in the Caribbean

From the forward written by Bryan Zhang Co-Founder and Interim Executive Director Cambridge Centre for Alternative Finance:

“Following their trailblazing work on Crowdfunding’s Potential for the Developing World (infoDev,2013), the authors of this report [Crowdfund Capital Advisors] carried out empirical research to assess the potential of crowdfunding in the Caribbean. It focuses on the prerequisite ‘building blocks’ for a thriving crowdfunding ecosystem – user capacity, laws and regulations as well as technology. It also put forward an array of actionable recommendations for key stakeholders, both public and private, to foster financial innovation, empower entrepreneurs and scale crowdfunding development in the Caribbean.

This assessment is comprehensive, lucid and timely. In essence, it provides a practical ‘road map’ for Caribbean nations to not only unleash the power of crowdfunding, but also to effectively harness it for the benefits of businesses, communities and the wider economy. To develop crowdfunding and make it work for individual countries, a deeper understanding of the evolving local market dynamics, the need of funders and fundraisers, the intricacy of regulatory environments, the robustness of legal system and aspects of technical capability is required. Therefore, as this report advocates, a holistic and ‘ecosystem-based’ approach would be best placed to unlock the potential of crowdfunding in the Caribbean, whilst ensure the development is sustainable and appropriately regulated.

The full report can be seen/downloaded here.

Data Proves Regulation Crowdfunding is a Revenue, Net Income Generator AND a Jobs Engine – What else is our Government & Media Waiting For?

Regulation Crowdfunding is a little over a year old and the data indicates that it is a revenue and income generator for companies and a jobs engine for the economy. The law requires companies that complete successful campaigns to file an Annual Report with the Securities and Exchange Commission (SEC) and also make it available to investors. 53 companies that were successful with their offerings by December 31, 2016 filed this form (C-AR) with the SEC. When comparing financial data from companies before vs. after crowdfunding campaigns, it is very clear that companies experienced increases in revenue, net income, and jobs, following a funding campaign.

Here are 3 very important findings:

1. Companies that used Regulation Crowdfunding doubled their revenue growth compared with the year before their crowdfunding campaign
2. Net income grew by 157% over the same period
3. On average, companies added 2.7 employees after crowdfunding. Not everyone created jobs. 13 companies reduced workforce, while another 13-increased workforce. If you remove the 13 that reduced their workforce the average increases from 2.7 to 5.7

As Congress looks for ways to stimulate the economy, considering ways to expand utilization of Regulation Crowdfunding may be worth exploring.

When Regulation Crowdfunding kicked off on May 16, 2016 we launched the Crowdfunding Transparency Database. This database collects information about every company that files an offering document with the Securities and Exchange Commission (SEC). For each offering we collect over 80 individual data points that range from information about the financial condition of a company, to the composition of the founding team, to the size of a company’s social network among many other important data elements. We analyze campaigns based on those that both hit their funding targets and those that fail. We look at valuations across geography and industry and we analyze the impact that the crowd’s money has on a company’s performance. We track this information and report it both on our Daily Index page and via quarterly webinars and presentations at the SEC.

Regulation Crowdfunding allows any American startup or small business to raise up to $1,070,000 million from potential investors on debt and equity crowdfunding platforms registered with the SEC. Similar to donation or rewards sites, Regulation Crowdfunding issuers launch campaigns and use their social network to invite people to review their business plans, market opportunity, financial statements and video pitch. However, instead of getting a token of appreciation or a widget, backers get shares in a business or interest repaid on a loan.

From the launch of Regulation Crowdfunding on May 16, 2016 to June 30, 2017, 399 companies filed with the SEC. Of those companies, 52% were successful in hitting their minimum funding target and $37M was funded to those companies. With the average campaign lasting only 103 days, compared to the many lengthy and cumbersome alternatives like applying for an SBA loan or seeking VC money, Regulation Crowdfunding seems to be a viable alternative given its high success rate over a shorter period of time.

Access to capital is the number one evergreen issue for startups and small businesses. If the data from Regulation Crowdfunding now proves that it helps grow enterprises and create jobs, both of which lead to taxable revenue for our government, shouldn’t more emphasis be placed on it by the government, our small business associations, local chambers of commerce, educators and the media? It seems like a solution is right under our noses yet no one seems to know it yet.