House considers positive Reg CF changes
In February, the House Financial Services Committee Subcommittee on Capital Markets held a hearing on growing Reg CF. “The Future of American Capital: Strengthening Public and Private Markets by Increasing Investor Access and Facilitating Capital Formation” explored ways Congress could help startups raise capital. Industry professionals and founders testified on various roadblocks and how to build prior successes like the JOBS Act of 2012.
Reg CF which arose from the JOBS Act opened the private capital markets to retail investors. The numbers tell the story. Since its start, over 6,500 startups have used the exemption, raising nearly $2.4 billion through 8,400 raises.
House considers positive Reg CF changes to allow stronger alternatives to venture capital
These raises have provided an essential tool for startups, particularly ones with a built-in crowd. The traditional VC startup route is littered with founder pitfalls. First, it’s exceedingly unlikely that a VC will fund the founder’s startup. VCs fund fewer than one-percent of pitches they receive—the vast majority coming from their local area. If you are one of the lucky ones, more issues await. Founders often lose control—20% to 40% are gone within 18-months of their Series A. Cashing out may take precedence over culture.
Startups need capital for launching, lawyers, operations, marketing, product development, employee retention. Reg CF is a tool that allows founders to raise capital whilst retaining control over the company, building for the long term, and allowing early supporters to participate in the rewards of a successful exit.
And it’s worked. According to witness Rebecca Kacaba, CEO and Co-Founder of DealMaker, since its inception, Reg CF has outpaced venture capital growth by 4.4x as compared to 1.3x. This capital has provided a vital tool for rising companies and has made them more likely to persevere through adverse market conditions.
DealMaker CEO suggests positive Reg CF changes
Indeed, Ms. Kacaba provided the most helpful testimony by suggesting further enhancements to Reg CF that will supercharge the already successful experiment in retail investment in the projected $14 trillion US private market. These include:
- Increase the Offering Limit for Regulation Crowdfunding From $5M to $10M in a 12 Month Period. When the SEC increased the offer limit in 2021 from $1.07 to $5M market activity jumped 250%, of course some of that was due to COVID and people becoming comfortable with investing online.
- Harmonize Rule 12(g) for Companies who Raise from Retail Investors, Growing the Space and Creating More Jobs. The 12(g) Rule which forces companies to register (go public) once it hits a certain number of investors or for Reg CF when the company has $25M in assets the 12(g) exemption vanishes forcing companies to get creative to stay private. This hinders Reg CF growth as this arbitrary number is not a proxy for the scrutiny of public markets.
- Remove the “Common Control” Element of Regulation CF Companies Eligibility, Allowing Entities Under Common Control to Raise the Maximum Amount Under Regulation CF. This is another hinderance to Reg CF growth particularly for industries ripe for disruption like franchises and entertainment.
Reg CF future is bright with growth outpacing venture capital in recent years. Indeed the warming to Reg CF by VCs is a sign of its importance in the fundraising ecosystem. But much more can be done. The House has taken the first steps toward realizing Reg CF’s full potential.
By Jossey PLLC
Ready to turn your company into a movement? Free consultation here: https://www.thecrowdfundinglawyers.com/cfl-scheduler/
