By Vanessa Malone
What the new equity crowdfunding amendments could mean for issuers and investors
This week, the Securities and Exchange Commission “SEC” officially amended rules under the Securities Act of 1933 to simplify and improve common securities exemptions companies use to raise capital.
The welcomed updates to capital raising vehicles Regulation A+ (Reg A+), Regulation CF (Reg CF), and Regulation D (Reg D) are the final results from the SEC’s concept proposal and public comments presented earlier this year.
The goals of the equity crowdfunding amendments are to:
- Reduce friction as issuers move from one exemption to another
- Increase capital raising limits and amend certain investor eligibility rules
- Provide clarity to issuers and investors regarding offering communications
- Amend what issuers need to disclose and what makes them eligible to invest in equity crowdfunding offerings
As a fintech company that delivers end-to-end securities issuance and trading technology to the equity crowdfunding market, we believe the amendments could have the following implications.
Sweetening the pot
Notably, the investment limit for Reg A+ was raised from $50 million to $75 million and Reg CF from $1.07 million to $5 million. We believe this could entice more established companies to incorporate equity crowdfunding into their capital raising strategy.
As the SEC stated in their announcement, “this important capital formation activity ranges from raising seed capital for new businesses to growth capital for companies of all sizes, including those on the path to a registered initial public offering.”
Capital is needed at all stages of growth. With harmonized rules for equity crowdfunding, companies of all sizes can benefit from inviting their fans to invest and take a vested interest in the companies’ journeys. Especially with the new amendment permitting issuers to “test-the-waters” before determining which exemption to use, companies can mitigate risk and test the appetite for their offering before launching anything.
Introducing unique investment opportunities
We believe that the combination of favorable regulation and positive upward traction will foster innovative investment opportunities.
The COVID-19 pandemic has forced many companies to get creative when it comes to implementing additional revenue streams. Especially in industries that depend on fan engagement and participation, for example sports or entertainment, equity crowdfunding could offer a unique way for fans to feel connected to their interests outside of a stadium or theater.
Just last week we announced the launch of Global Fan Exchange, a platform that will allow fans to invest in their favorite professional athletes. We believe that this technology and methodology could redefine fan engagement.
Fueling equity crowdfunding market maturation
Reg A+ and Reg CF have only been around since 2015 and 2016, respectively. Despite being new, the amount of new capital raised through exempt securities offerings outpaced the amount of capital raised through traditional, registered securities offerings in 2019.¹
The market is growing rapidly, as is the technology infrastructure to support it. We’ve also been seeing movement to address the liquidity problem that equity crowdfunding has been facing since inception with options for secondary trading opportunities being introduced in the U.S. and globally.
The harmonization of the equity crowdfunding rules and the increased capital raising limits could speed up the urgency for streamlined solutions and platforms that support the offerings.
We are thrilled that the equity crowdfunding market has been seeing favorable regulation and positive upward traction. We look forward to supporting the wave of issuers with Horizon’s issuance and trading technology.
Note: The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.
Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of exchanges and securities offerings in the U.S. and globally. Visit us at https://www.horizonfintex.com/.