Over the past decade, major changes have been made to the U.S. Securities and Exchange Commission (SEC) guidelines to allow startups to utilize equity crowdfunding (CF) to raise capital. Back in 2012, the Jumpstart Our Business Startups (JOBS) Act was passed. Title II of the JOBS act became effective in 2013 and allowed for start-ups to raise capital publicly from accredited investors through approved online platforms. The new exemption allowing companies to advertise security offerings meant that startup companies were able to showcase themselves to a much larger number of investors over a relatively short period. Before the JOBS Act, it was against the law for a private company to publicly advertise to the general public that they were raising an investment round.
At the ‘Cane Angel Network (CAN), we work with start-ups to access capital and are always looking for faster, cheaper and more efficient ways to do this. The JOBS Act has opened new avenues for start-ups to raise capital which we believe will lead to more efficient and better allocation of capital. CAN works collaboratively with other sources of capital to get the best results for the start-ups that come to us, and we think that recent updates to the JOBS act will only benefit companies looking to raise money.
More drastic updates to the U.S. SEC regulations were enacted in 2016 under Title III of the JOBS act to allow non-accredited investors to partake in equity CF. Title III is also known as regulation crowdfunding (CF). This opened up the doors for start-ups to publicly solicit security offerings to the general population. However, Title III comes with much tighter regulations than Title II, only allowing companies to raise up to 1.07 million in one year. Under Title II, all investments are done by accredited investors that either have an annual income over $200,000 a year for three consecutive years or a net worth greater than one million, so there is not a cap on the amount of capital raised. Nonetheless, regulation crowdfunding through non-accredited investors opened new doors for startups to raise capital in a non-traditional way through using approved third parties like Wefunder that take a percentage cut of the funds raised.
Just this year in January of 2021, the most updated guidelines have increased the cap amount under Title III to $5 million up from $1.07 million in a 12-month period. After a year marked by businesses struggling due to Covid’s negative implications on the market, new guidelines offer more access to capital for growing startups. The cap increase is just the tip of the iceberg when it comes to the increased potential that these new regulations provide. Investment limits for both accredited and non-accredited investors under the old regulation CF equity crowdfunding rules have been increased. There is no longer a limit on accredited investors, and non-accredited investors can now invest a greater amount than before. Included in the amendment are also looser rules regarding general solicitation allowing companies to advertise their upcoming round before filing Form C with the SEC. Form C contains the details of a company’s small online public offering (OPO) and is reviewed by investors when evaluating an investment opportunity. It used to have to be filed prior to publicly stating that your company would be raising a round but now you can pre-campaign before your offering goes live.
These new regulations will bring about increased hope for new start-ups coming out of a tough year to be able to raise capital under Title III of the JOBS Act. In addition, back on May 4, 2020, some temporary provisions were made in SEC crowdfunding rules to benefit small businesses affected by Covid-19. Certain regulations were waived due to the Covid-19 provisions to help expedite the offering process and make it easier to urgently raise capital. These changes were originally set to expire on March 1, 2021 but have been extended till at least September 1, 2021. In combination with the new SEC regulation equity CF rules, all of these changes and extended provisions should help startups as they start 2021.
This page was written by Catherine LaSpina and Jeffrey Camp. Ms. Catherina LaSpina is a member of the CaneAngel Network investment team and is pursuing her MD/MBA at UM. Mr. Camp is the Managing Director of the Cane Angel Network.
