by Sean Levine
Finally, change for the better is officially afoot in the world of private placements. With the world engulfed in the COVID-19 pandemic, this exciting regulatory policy shift comes not only as a much-needed opportunity for the little guy, but could prove to be a significant driver of America’s economic recovery, as well.
On March 4, the SEC proposed sweeping changes to several rules covering private capital raise registration and regulation exemptions, in an effort to “provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections.”
Historically the go-to mechanism for most larger, institution and high net worth-focused capital raises is either Reg D 506b or 506c. Reg D will see only minor adjustments. The other expected changes will be to Reg A+, where the maximum annual cap raise limit will increase by 50%, from $50 million to $75 million and secondary shareholder participation will also increase by 50%, from $15 million to $22.5 million.
The most extensive proposed changes however lie within the rules governing Regulation Crowdfunding (Reg CF for short). The Reg CF exemption has — until now — been effectively useless for raising capital due to the $1.07mm cap. Frankly, Reg CF was considered a joke that only a small niche of companies ever utilized, tainted as a trivial way to raise capital. Philosophically, Reg CF has been more akin to a Kickstarter or GoFundMe campaign than to a mainstream method to raise growth capital.
With the envisioned Reg CF changes, the private capital universe will experience a positive shockwave for early-stage issuers at the Seed and Series A capitalization round levels.
Reg CF is the progeny of the 2012 JOBS Act, with the governing rules not taking effect until four years later in 2016. The act sought to create a mechanism for regular, non-accredited (i.e., for lack of better shorthand, “not wealthy”) investors to participate to a greater degree in private capital markets. Additionally, the SEC recognized the difficulty start-ups and early-stage companies had accessing capital markets relative to their larger peers. Reg D offerings are only available to accredited investors and institutions often unwilling to take a chance on unproven companies, and frequently involve significant fundraising costs. Meanwhile, Reg A raises are burdened by onerous filing and disclosure requirements often making that type of offering equally unsuitable.