Industry tells Securities and Exchange Commission why they should Raise the Regulation Crowdfunding Cap to US$20M
In a letter to the SEC dated July 19th, the Regulation Crowdfunding largest platforms and industry influencers provided data and analysis to support increasing the Regulation Crowdfunding cap to US$20M.
The letter comes after SEC Chairman Clayton said in a live chat with FINRA President and CEO Robert Cook, “I continue to worry that retail investors do not have access to as broad a slice of our capital markets as I would like them to have. Said another way, you have private capital and public capital. Retail investors can really only participate in the public capital, and to the extent private capital has become so robust, you’ve shrunk opportunities. That bothers me a bit. If that trend continues, a much more select group is participating in the growth of the economy.”
The following data points and analysis were provided to support the increase:
Since the launch of Regulation Crowdfunding[1]:
- Over 1,000 companies have filed with the SEC to raise money on online platforms that are registered with FINRA to facilitate capital formation.
- Over $137M has been committed to these issuers. 95% ($130.4M) of that capital was funded and invested into 715 companies (68.5% success rate).
- These 715 companies are supporting 4,172 jobs and producing over $249M in revenue.
- Issuers have filed in almost every state in the Union.
- Issuers have been funded in 80 industries (according to Morningstar’s Global Equity Classification Structure).
The cap should be adjusted because:
- There has been zero fraud, competent issuers have been able to raise serious capital from investors that believe in their products or services, and retail investors (for the first time in recent history) have a transparent, systematic way to back companies they believe in.
- Successfully funded companies are supporting and creating valuable jobs and providing substantial economic activity in a broad range of locally important industries all around the United States.
- The initial cap of US$1M was meant to be adjusted. Only once since the launch of Regulation Crowdfunding has this been adjusted and at the time only by $70,000. Such de minimus adjustments do not fully allow meritorious issuers to fully benefit from this new form of online finance nor expand the opportunity for issuers seeking to raise in excess of $1M.
- The current $1M level is now far below what startups and SMEs need for seed stage capital. May 2018 data[2] indicates that the median sized funding round for Angel or Seed stage companies in the US is $2M. This means that even for the smallest funding round the current limits do not allow an issuer to raise their entire round via Regulation Crowdfunding. This dramatically increases costs and time spent on raising capital by US businesses. This reduces the number of American innovators and job creators in the United States.
- While the “funding gap” that Regulation Crowdfunding was meant to address is filling the void. The funding “opportunity” really comes from those small/medium firms that are seeking to raise up to $20M. Raising funds under $20M has become increasingly challenging as Venture Capital/Private Equity has moved upstream over the past decade. Raising the cap will allow issuers that wish to utilize this form of online finance the ability to raise in excess of $1M and tap their local investors without having to deal with the costly, time consuming process of either filing a full prospectus with the SEC or spending hundreds of thousands of dollars on a private offering.
- Many companies forego Regulation Crowdfunding in favor of Reg D, 506(c), because of the low Reg CF limit. This has the effect of reduced disclosure to investors, since Form D provides less information even than Form C. In addition, ordinary investors are cut out of some of the most attractive deals that have already attracted institutional funding, which seems unfair and counter to one of the goals of Reg CF.
- Both the United Kingdom and Germany have adjusted their caps to 8M EUR (US$9.4M). The United States should not be a follower but a leader.
People are being asked to call their Senators and Representatives to ask them to support increasing the cap and helping small businesses access capital, create jobs and foster local innovation.