|Just a few minutes ago, at a Securities and Exchange Commission Hearing, the SEC approved amendments to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses and entrepreneurs across the United States. The vote was 3 to 2. SEC Chair Clayton said, “He’s extremely pleased with the work done by the Commission. That the changes will modernize the exempt offering framework and have a lasting impact on our capital markets without detriment to investor protection.”
Some of the key Regulation Crowdfunding (aka Reg CF) changes include:
- Increasing the maximum a company can raise from $1.07 million to $5 million
- Amending 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.
- Permitting issuers to “test-the-waters” prior to filing an offering document with the Commission.
- Permitting “demo day” communications that would not be deemed general solicitation or general advertising.
- Permitting the use of Special Purpose Vehicles to facilitate investing in Regulation Crowdfunding issuers
“We are thrilled that the Commission has finally increased the maximum issuers can raise under Regulation Crowdfunding,” say Sherwood Neiss, principal at Crowdfund Capital Advisors. “When we began lobbying for Reg CF, we artificially set a low maximum target of $1 million so that we could test the model and make sure there was no fraud. Under those limits, more than 2,800 companies in 430 industries, across 50 states have raised over $500 million dollars in just 4 years, with no fraud. The model is working incredibly well.”
“A $5 million limit and other substantial regulatory changes will expand crowdfunding’s use rapidly. At $5 million, a tech startup can raise a seed round or a traditional small or mid-sized company can raise expansion capital. This will open significant new opportunities for businesses to use this capital to recover from the current economic crisis or launch innovative new products and services.” says Jason Best, Principal at Crowdfund Capital Advisors. “For the first, time we have easily accessible, real time data on the economic health and sentiment of startups and small and medium enterprises (SMEs) and of the communities where they are based. This enables policymakers to understand immediately, how the SEC’s action today is positively impacting Americans’ lives. We are grateful to the Small Business and Entrepreneurship Council for its tireless efforts on behalf of these changes and for their ongoing education of their members about how to use crowdfunding to enhance their businesses. Every community across the country should immediately educate themselves about this new opportunity to support their local businesses.”
The vote comes at a time when local businesses and local economies across the USA are facing the most challenging economic crisis since the Great Recession. The third wave appears to be worse than the first two with many Americans bracing for another shut down like in other parts of the world. If this happens, millions of small businesses that were just scrapping by might permanently shut their doors leading to a housing crisis as unemployed people cannot pay their rent or mortgages.
There is a way to supercharge Regulation Crowdfunding and provide immediate, impactful stimulus to Main Street businesses that may not survive the pandemic. That is for the Federal Reserve to take $20 billion of the $596.3 billion they have remaining from the Main Street lending, PPP and EIDL programs and put it into the Main Street Recovery Co-Investment Fund. This fund would match dollar for dollar, up to $250,000, into businesses that are struggling to survive the pandemic but have customers that wish to see these businesses survive. By turning these customers into investors (what we are calling investomers), the businesses access capital from customers who are now stakeholders in the business and the government can successfully deploy capital at the most micro level into communities all across the USA.
The good news is, many small business have already begun to see the potential in turning to their customers for capital to bridge the divide. The data shows that more companies are turning online to raise funds from investors, more investors are pouring in capital and more money is being raised. Take a look at the following charts:
Broad Appeal Among Industries Across the USA
It is important to show the wide range of industries that are represented. There are over 430 industries represented by issuers using Regulation Crowdfunding. The chart to the right looks at the top 15. It shows is that there is broad appeal by both issuers in a variety of industries and investors interested in backing these enterprises. The two things we expect to change over the next year, given the SEC changes, is more real estate offerings and more medium sized issuers entering the market. The $1 million cap limited many developers/issuers from leveraging money from Reg CF investors, increasing the cap to $5 million means more small/medium sized developers/issuers and more investors will be leveraging Reg CF for funds and diversified investment opportunities. It also means that firms with Revenues between $10M and $50M will find Reg CF more appealing as a mechanism for raising funds. It will be a cheaper alternative than hiring an investment bank and a faster method as the time to raise funds averages around 90 days.
Continuous, Fraud Free Growth Coupled with Pandemic/Amendments Equals Tipping Point
The next chart demonstrates how investments and investors have been increasing since the launch of Regulation Crowdfunding began in May 2016.
As one can see, the industry began to see record numbers starting in July 2020 (Note Since Regulation Crowdfunding began in May 2016 we use May as the beginning of the fiscal year and hence Q1 begins in May each year).
One can also see that when COVID hit and the economy shut down so did investments. Investments went from $12.3 million in January down 35% to $8 million in February. From there, the numbers increased month to month with October seeing a record amount committed at $32 million. This represents at 300% increase in commitments in just 6 months. So, while the pandemic raged, investors did not appear to be discouraged about investing in their community businesses.
What is also interesting in the chart above is that you can see the dollars increasing even though the number of investments has fluctuated. This means that the average check size investors are writing is increasing. In February, when the markets shut down, the average check size was $436. In October that amount doubled to $879. Because they are writing larger checks, this bodes well for Main Street businesses that will need to turn to their customers for capital over the next year. But it should also be a point of relief for concerned regulators that might fear investors are putting too much into risky enterprises. The fact is, investors are being rationale with their check sizes, only writing as much as they can afford to risk and an amount that appears to represent just a fraction of their overall savings.
Steady Growth in Offerings Over Time
This next chart shows the growth in monthly offerings over time.
As you can see the number of offerings also increased after a brief downturn in February and March. July saw the highest number of offerings at 128 since Regulation Crowdfunding began and October saw the second highest number of offerings at 115. With the changes made by the SEC, this means that issuers that need to raise in excess of $1 million but less than $5 million will be turning online for funding.
Seasonal Growth Also Points to Tipping Point
If we compare same period growth (chart right), we see the following year over year results. While the number of offerings between 2018 and 2019 was down year over year for the majority of the year, despite COVID, the number of offerings is up from 2019 to 2020, with June and July seeing the highest percent increase. We expect that the number of issuers leveraging Regulation Crowdfunding will easily double in this next year alone.
“The data has been positive for Regulation Crowdfunding. The industry has proved the naysayers wrong and the opportunity for issuers and investors affirming,” says Neiss. “This truly represents the democratization of access to capital we promised and a way to engage investors at the most local level. If we can just get the government to focusing on investing alongside community investors, I believe we can get through this pandemic with minimal scars.”