The Future Of Crowdfunding
Investment Crowdfunding isn’t a very old industry.
But it is a quickly evolving one.
Even though the JOBS Act that paved the way for investment crowdfunding was signed into law in 2012, and the first deals worth paying attention to only started turning up about five years ago, since then we’ve already seen one pretty significant cycle of changes to how things are done.
Among a few other minor changes, in 2021, the rulemakers 5x’d the total amount of money a company could raise under Regulation CF from $1,000,000 to $5,000,000.
That had a big impact. Until then, only the smallest of startups were using Reg CF.
That’s because most companies with any scale or traction whatsoever need more than $1,000,000 to move the needle on their growth plans.
That left Regulation A as the only real option if a company wanted to sell stock to regular investors without paying tons of money to register and get a ticker symbol.
But Regulation A is, itself, a lot more expensive and time-consuming for a company to use than Reg CF.
So ramping that maximum amount to something more substantial created all kinds of interest in Reg CF among startups and early stage companies, and the number of companies using Reg CF spiked dramatically as a result.
That change happened because the industry went to the regulators and told them that they needed to fix the problem.
View from “Top of the Town”, Arlington, VA, across the Potomac from DC at the CFPA’s 2024 Regulated Investment Crowdfunding Summit
And now, the industry is getting back in front of the regulators.
Because the companies using Reg CF matter.
Last year, they contributed over $2 billion in revenues to the tax bases where they operate, and our data partner CClear expects them to do it again this year, and next year as well.
So the easier the government makes it for companies to use investment crowdfunding, and the easier they make it for people like us to participate in the success of those companies, the better.
And that’s why the industry descended on Washington, DC on October 21-23.
To “Harass the Hill” and let Congress and our regulators know what we see as needed to make crowdfunding work better for everybody.
And you know I’m not one to miss a bull session.
Or a party.
So you know I was there.
And I took notes.
Yours truly taking in the sights with CClear Head of Business Development Yvan de Munck
So without further ado, here are some highlights of what the CFPA (Crowdfunding Professional Association) wants to see happen to make crowdfunding work better for the companies who use it, their investors, and our country!
NOTE/DISCLAIMER: This is just a summary in my own words. I’ve left out a few of the more technical and some other topics.
1) Reg A+ issuers are currently limited to raising a maximum of $75 million per year under that exemption, while Reg CF issuers are limited to $5 million.
The CFPA wants to see the Reg A limit doubled to $150 million, and the CF limit boosted all the way to $20 million.
I would be surprised if the SEC lets the CF limit run all the way to $20 million any time soon, but $10 million definitely seems like an achievable next step, especially considering how popular the hike from $1 million to $5 million was.
2) This one might be my favorite. Crowdfunding is obviously risky. But at the same time, crowd investors are helping the economy by planting the seeds to help new businesses grow.
So to offset some of that risk, CFPA wants to establish a tax credit for folks investing in crowdfunding deals. The credit would look at your crowd investing during the previous year, and you’d get a credit for half of what you invested up to a maximum of $1,000 ($2,000 for couples filing jointly). The proposal would only apply for Reg CF investments and would cut off before the top tax bracket.
But hey, it’s a start!
3) The documentation connected to these crowd offerings can be very long, with lots of fine print.
CFPA wants the SEC to force crowd issuers to submit searchable documents, so that investors can quickly find the information they need when they’re trying to research these deals.
Regular people aren’t lawyers, and ought to be able to find the information they’re most interested in without their eyes glazing over.
4) There are some hefty reporting requirements around financial statements for companies using Regulation CF and Regulation A. But many companies using these rules are startups and don’t have any operating history to begin with.
So these rules create a steep barrier to entry.
The industry wants to see regulators eliminate accountant reviews and audits for companies with less than 6 months of operations, and to get rid of more intensive GAAP reporting requirements altogether for early-stage companies using Reg A and CF.
5) The broker-dealers and funding portals who “host” crowd offerings complain of frequent headaches in dealing with their regulator, FINRA (which replaced the old National Association of Securities Dealers or NASD years ago).
Complaints include dragging out the approval process for new portals, inconsistent application of rules, and little to no transparency on all of the above so that the regulated groups can avoid getting into trouble in the first place.
It’s almost like FINRA doesn’t want the industry to know what the rules are, in order to make it easier to penalize it.
So CFPA is asking for published guidance from FINRA for applications and ongoing operations, and for consistent application of the rules.
Seems like the only fair thing to do.
6) The advertising rules around crowd deals, particularly Reg CF deals, are a veritable minefield. And you can take my word on that one, because that’s part of what we do here at InvestmentX. There are several different categories of activity, with rules for each, and overall they’re extremely restrictive.
It’s entirely possible to talk about the terms of a deal without committing fraud. We’d like to see some of these restrictions loosened a bit.
Cheers ‘til next time!
Cheers ‘til next time!
Sean Levine
InvestmentX