Big news was just dropped on the angel investing world by the SEC this week, further opening the doors for investors and startups alike. Continue reading to see what it means for you and the startups in the Reg CF space.
The SEC oversees regulation crowdfunding (Reg CF) and sets the rules for investors and the startups using it to raise capital.
Earlier this week they released an amendment to the regulation that brings 3 changes to Reg CF in January 2021.
One of the biggest restrictions put on startups raising capital under Reg CF is the limit to the amount they can raise –– which today is capped at $1.07M.
When the amendment takes effect early next year, that cap will be raised to $5 MILLION.
This is huge for startups since access to capital is a major factor of growth and overall success.
But it should also attract even more startups to the space, giving investors greater access to high-quality, mature startups.
This is big news, don’t get me wrong.
But change #2 is absolutely massive and hits on one of the most common questions I hear from investors…
“How much can I invest each year?”
SEC Improves Reg CF
The SEC has just made three huge changes that improve opportunities for entrepreneurs and angel investors.
With these changes, Regulation Crowdfunding has become much more powerful. Best of all, non-accredited investors can now invest more in private markets than ever before.
Here are the three big changes that you need to know about, set to take effect in January 2021.
1. The Reg CF Limit Has Been Raised From $1.07M to $5M
The whole purpose of Regulation Crowdfunding is to give smaller and early-stage companies the ability to raise capital without having to jump through hoops to register with the SEC. This makes for a straightforward and accessible route to raising capital.
Now that the maximum a startup can raise from investors over 12 months has nearly quintupled, Reg CF becomes an even more powerful tool. Startups that would usually opt for more difficult offers will now turn to Reg CF because of this increase.
This is a huge step for the startup world. We can expect stronger, better startup deals to come into the realm of the non-accredited investor.
2. Non-Accredited Investors Can Invest More Each Year
When these changes take effect in January 2021, an investor’s limit over 12 months will be based on the greater of their annual income or their net worth.
Currently, the limit is based on the lesser of an investor’s income or net worth.
This is absolutely huge for investors.
Under the current limits, an investor with an annual income of $30,000 and a net worth of $105,000 would have an investment limit of $2,200 annually (Greater of $2,200 or 5% of $30,000).
Once this amendment takes effect, the limit will be based on the greater of the investor’s income or net worth –– in this case, their net worth.
So their 2021 limit would then be 5% of their $105,000 net worth, or $5,250.
In another example, an investor with a $100,000 annual income and a $500,000 net worth can currently invest $10,000 per year (10% of the lesser of the two).
Come January 2021, they’ll be able to invest up to $50,000 per year (10% of the greater of the two).
These new, higher numbers give regular investors more freedom. You’ll be able to put more into the private markets and have the ability to build your startup portfolio like never before
3. Startups Can Now “Test the Waters”
Previously, there were strict limitations on what a startup could do and say before revealing its campaign to investors.
Under the new rules, certain kinds of marketing are permitted before the campaign to “test the waters.”
Specifically, the SEC now allows issuers to use “generic solicitation of interest materials” before filing or even determining which type of offering they will use.
Also, “demo day” communications no longer fall under banned general solicitation or general advertising and are permitted.
These new rules help startups learn how interested investors are in their company before going through the trouble of filing for a Reg CF offering. This grants them flexibility.
Demo days and other kinds of permitted marketing will allow for a greater buzz to grow around the startup before their offering, increasing the chance that it will be able to earn higher levels of funding.
SEC Moving in the Right Direction
The SEC has done a lot this year to make the private markets more accessible to investors and more powerful for entrepreneurs.
In addition to easing restrictions on Reg CF, Regulation A, and Regulation D, the SEC has added relief measures for companies to cope with difficult market conditions and amended the definition of “accredited investor” to not only factor an investor’s finances but also their expertise.
Because of the changes, we believe we’ll begin to see more startups raising capital in the Reg CF space.
Startups that would never have considered this route previously, will now be enticed by a larger funding limit of $5 million and an overall streamlined process.
With the influx of new startups seeking large amounts of capital, angel investors need to step their game up. These days, companies are staying private longer, and their highest growth phase is almost always well before they go public.
The best way to get ready for this next stage of Regulation Crowdfunding is to educate yourself.
We will continue to provide our members and readers the best angel investing education available so they can take advantage of the thriving private markets.