The Current State of the Equity Crowdfunding Industry
Despite the odds, 2020 was huge for crowdfunding. What does 2021 hold?
The equity crowdfunding industry heads into the second quarter of 2021 overall small, but still flush from the massive and somewhat surprising gains seen in 2020. Equity crowdfunding market future growth continues to be positive.
Meanwhile, there is a lot happening on the regulatory front, with amendments to Regulation CF and Regulation A+ going into effect on March 15, 2021. Regulation A+ still can be used to great effect and is helping to bring new life to mini-caps, and amendments to Regulation D are helping to modernize the private placement framework.
Let’s dive into what’s new:
Equity Crowdfunding: 2020 in Review
2020 was certainly a year to remember. While the pandemic led to broad stagnation in many markets, some industries thrived. In some cases, there was a fine line between the haves and the have-nots.
At the peak of the pandemic shutdowns, many venture capital firms hit the pause button on new investments and chose instead to double down on their existing portfolios — not a bad move, especially when so little was known about how long market losses would persist and how deep they would go.
That put many entrepreneurs in search of capital seeing alternative sources of early-stage money to keep their doors open. Equity crowdfunding was one of the new benefactors. While some industries took a major hit, others were propelled years into the future — witness the shift to online work, the massive uptick in online shopping, and the reordering of economic priorities seemingly overnight.
2020: A Massive Year for Regulation CF
Online finance raised $239 million in 2020 from 358,000 investors, enabling 1,100 small businesses, reports Crowdfund Capital Advisors.
That was a huge jump from 2019, when capital commitments totaled $134.8 million.
Online fundraising for unique companies rose nearly 59% in 2020 against 2019, and while March and April were undoubtedly slow, momentum accelerated through the year as issuers looked for solutions to the capital crisis hollowing out traditional markets.
The practice grew enough that even by midyear, crowdfunding capital was becoming rather conventional.
“Crowdfunding is no longer a fringe activity but gradually moving mainstream with substantial volumes recorded nationally, regionally, and globally,” noted one academic report.
What does the future hold? The segment could top $500 million in 2021.
Regulation CF for 2021
Changes from the U.S. Securities and Exchange Commission to Regulation CF promise to shift the market further. Those changes include:
- Increasing the maximum issuers can raise to $5 million from $1 million
- Allowing the use of Special Purpose Vehicles to streamline communication between issues and investors and ease follow-on financing
- Amend investor limits by removing the limits for accredited investors and using greater annual income or net worth when calculating investment limits for non-accredited investors
- Streamlining the offering exemption framework
The SEC last summer announced an extension of temporary amendments to Regulation CF. Included is an extension of the effective date and applicability rates of the temporary final rules of Regulation CF to boost capital formation for small businesses impacted by the pandemic.
“The temporary final rules are intended to expedite the offering process for smaller, previously established companies directly or indirectly affected by COVID-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding,” the agency wrote. “The temporary final rules are designed to facilitate this offering process by providing tailored, conditional relief from certain requirements of Regulation Crowdfunding relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials while retaining appropriate investor protections.”
The amendments will remain in effect until Sept. 1, 2021.
Regulation A+: March 15 is the Big Day!
Regulation A+ has now been live for six years.
What does it do? Reg A+ was meant to make it easier for small companies to raise money in secondary markets while also giving retail investors access to the sort of investment option that Wall Street firms typically had a (strangle)hold on.
While it struggled early on, Reg A+ seems to have found a footing in recent years. Companies raised $30 million in Series A online rounds in 2020 through 10,000 retail investors. Since going live in 2015, an estimated $3 billion has been raised through Reg A+ offerings.
What’s in store for 2021? Well, more money.
The SEC recently raised the Reg A+ capital limit from $50 million to $75 million, a change that goes into effect on March 15.
“What that means is that we’re now going to see even larger companies come into the industry that might previously not have pursued a Reg-A because they wanted to raise more than $50 million. So this change will drive a higher quality caliber issuer into the industry,” Daren Marble, CEO at Reg A+ issuers technology provider Issuance, told Yahoo! News.
Investors and companies alike are coming to see Reg A+ as equal parts capital raising machine and marketing tool, with recent success stories like DoorDash, Peloton, and Sonos proving the point.
“From the start, we’ve always been a big proponent of Reg A+ and are excited to see it enter this new phase,” said Jason Paltrowitz, executive vice president of corporate services at OTC Markets Group, also told Yahoo! news. “We want companies to know that just like Reg A+ is a capital-raising alternative to the traditional IPO, OTC Markets disclosure-based, dealer markets are better suited to newly traded public companies.”
Regulation D: Reserved for Accredited Investors
Regulation D continues to be the domain of accredited investors — those earning more than $200,000 annually ($300,000 if married) or who have a net worth of at least $1 million, with that figure not including a primary residence.
There is some movement on the regulation, however. In December, New York updated Reg D filing procedures and eliminated some Form 99 filings.
Investors can still take advantage of a nearly 12-year old rule update for Regulation D that allows businesses to raise capital and use public advertising along the way. Previously, private companies were required to go through the SEC’s registration process and follow the accredited investors’ rule. 2013’s JOBS Act Rule 506 included an exemption that allowed private companies to advertise as long as they only accept accredited investors’ investments in the end.