Just a few weeks ago, the SEC released a 341-page document outlining some regulation updates.
Sounds pretty boring, and usually it is… but this time the changes are sweeping.
And the result will be nothing short of a revolution in angel investing. Honestly, I’d almost put it on par with the JOBS Act, which originally made startup investing available to everyday people back in 2016.
So needless to say, I want to make sure you know exactly what’s going on, when it’s going to take effect, and what it means for you (and our deal flow).
Let’s get started.
First, and most notably, the SEC suggested increasing the annual limit on how much a company can raise using Regulation Crowdfunding. Right now, companies are capped at $1.07 million, which we’ve seen fill very quickly here at the Network. And, for some early-stage companies, that’s the perfect amount they need to scale.
But for other startups, it’s not enough. So that limit is a huge barrier for them when it comes to raising money from the crowd.
The proposed increase to $5 million will open up equity crowdfunding as a viable option for a whole new segment of larger companies. It means an entirely new class of deal flow for us – I’m so excited.
On top of that, the SEC is also considering raising the annual limit for Regulation A offerings to $75 million, giving more mature businesses the ability to do larger “mini IPOs.”
But we also need to cover the other side of the spectrum. Because up until now, the structure of Regulation CF has been presenting problems for the tiniest of tiny startups, too. I mean those that really only need or want to raise a few hundred thousand dollars to start.
Without getting into the nitty gritty of it, I’ll just say this: The accounting and legal requirements for startups to raise money from the crowd can be expensive. The earliest of early stage companies just can’t afford it – I mean, they’re out here to raise a few hundred thousand to launch their idea. If they had to immediately turn around and use that to pay a lawyer, it’s just not worth it. So they’re forced to look elsewhere for capital.
But with the new regulations, the SEC is making it easier and cheaper for exactly those kinds of startups as well. So, you’ll be seeing new offerings coming from the earliest stage companies that need no more than $250,000 within the year. While these earlier stage companies would be even more speculative as investments, the upside could be greater as you get to fund them far earlier in their lifecycle.
There are more changes, of course, which help startups keep their cap tables streamlined (via SPVs) and another amendment which allows a company to “test the waters” for interest before formally raising capital.
All in all – it means great news for startups and a clearer path to deal flow for you.
But it’s not all about the startups.
The SEC’s proposal also addressed the current investment limitations for accredited and non-accredited investors in Regulation Crowdfunding offerings. Right now, all investors are limited based on the lesser of their income and net worth. The proposed changes would remove the investment limit for accredited investors and change the criteria for non-accredited investors to the greater of income and net worth.
All of the components of the proposed changes are, in SEC Commissioner Hester M. Peirce’s words, “to remove unnecessary friction from the capital-raising process.”
I don’t know about you, but I am very excited about the future of this industry. And with these new amendments, it only means more opportunities and more deals coming our way.
I’ll keep you informed as things unfold. In the meantime, take a look at the rest of what’s going on in the angel investing world by checking out our quarterly report.
Until then,
Neil Patel
Sounds pretty boring, and usually it is… but this time the changes are sweeping.
And the result will be nothing short of a revolution in angel investing. Honestly, I’d almost put it on par with the JOBS Act, which originally made startup investing available to everyday people back in 2016.
So needless to say, I want to make sure you know exactly what’s going on, when it’s going to take effect, and what it means for you (and our deal flow).
Let’s get started.
First, and most notably, the SEC suggested increasing the annual limit on how much a company can raise using Regulation Crowdfunding. Right now, companies are capped at $1.07 million, which we’ve seen fill very quickly here at the Network. And, for some early-stage companies, that’s the perfect amount they need to scale.
But for other startups, it’s not enough. So that limit is a huge barrier for them when it comes to raising money from the crowd.
The proposed increase to $5 million will open up equity crowdfunding as a viable option for a whole new segment of larger companies. It means an entirely new class of deal flow for us – I’m so excited.
On top of that, the SEC is also considering raising the annual limit for Regulation A offerings to $75 million, giving more mature businesses the ability to do larger “mini IPOs.”
But we also need to cover the other side of the spectrum. Because up until now, the structure of Regulation CF has been presenting problems for the tiniest of tiny startups, too. I mean those that really only need or want to raise a few hundred thousand dollars to start.
Without getting into the nitty gritty of it, I’ll just say this: The accounting and legal requirements for startups to raise money from the crowd can be expensive. The earliest of early stage companies just can’t afford it – I mean, they’re out here to raise a few hundred thousand to launch their idea. If they had to immediately turn around and use that to pay a lawyer, it’s just not worth it. So they’re forced to look elsewhere for capital.
But with the new regulations, the SEC is making it easier and cheaper for exactly those kinds of startups as well. So, you’ll be seeing new offerings coming from the earliest stage companies that need no more than $250,000 within the year. While these earlier stage companies would be even more speculative as investments, the upside could be greater as you get to fund them far earlier in their lifecycle.
There are more changes, of course, which help startups keep their cap tables streamlined (via SPVs) and another amendment which allows a company to “test the waters” for interest before formally raising capital.
All in all – it means great news for startups and a clearer path to deal flow for you.
But it’s not all about the startups.
The SEC’s proposal also addressed the current investment limitations for accredited and non-accredited investors in Regulation Crowdfunding offerings. Right now, all investors are limited based on the lesser of their income and net worth. The proposed changes would remove the investment limit for accredited investors and change the criteria for non-accredited investors to the greater of income and net worth.
All of the components of the proposed changes are, in SEC Commissioner Hester M. Peirce’s words, “to remove unnecessary friction from the capital-raising process.”
I don’t know about you, but I am very excited about the future of this industry. And with these new amendments, it only means more opportunities and more deals coming our way.
I’ll keep you informed as things unfold. In the meantime, take a look at the rest of what’s going on in the angel investing world by checking out our quarterly report.
Until then,
Neil Patel
Still trying to learn how to navigate through this system so I can familiarize myself which way I need to go
I want to start with a deposit