T he Securities and Exchange Commission may have finally just unleashed real crowdfunding, if not exactly in the manner everyone expected.
In a surprise move today, the SEC voted to let young companies raise up to $20 million from regular people without having to register with the agency — also without having to disclose audited financial statements or go through an arduous, state-by-state regulatory maze. The limit was expected to stay at $5 million.
“That’s sort of the big shocker here,” said Kiran Lingam, general counsel at the investment platform SeedInvest. “Nobody expected that.”
Less surprising: The SEC approved one aspect of the 2012 JOBS Act’s Title IV’s “Regulation A+” as expected, creating an “IPO Lite” option capped at $50 million for fairly mature companies prepared to start filing regular audited financial statements. Despite lobbying from state regulators, companies pursuing that option will be able to get a single level of federal clearance instead of state-by-state approval. They’ll also be able to advertise their offerings, take investments from amateur investors, and the equity can be traded freely after the fact.
The IPO Lite option is a big step by itself for the crowdfunding movement. But its utility is likely limited to fairly mature startups that are prepared to pay auditors and remain in the public eye much like a truly public company.
But the lower tier, with its less demanding set of rules, was expected to stay capped at $5 million, a level most analysts say is too low to justify the considerable legal and regulatory expense. The decision to raise the limit to $20 million could greatly expand the world of potential users.
However, there are some caveats. Those companies will still have to issue “reviewed” financial statements (but not audited statements; also, they won’t have to keep filing into the future). Also, those companies won’t get the full exception from state-by-state securities laws, instead being subject to a new “coordinated review” created by various states worried about losing power.
“It’s all going to hinge on whether coordinated review is actually going to work, be cost effective and be streamlined,” Lingam said. “If coordinated review works, this is going to be a great option, but if it doesn’t it’s dead.”
All this was designed to make it easier for companies to raise money while not registering with the SEC, a process that today usually happens under Regulation D exception, specifically the 506(b) option that limits your funding to a small, unadvertised group of professionals. The rules go into effect 60 days after being published in the Federal Register, likely in June.
Any company that starts allowing the masses to invest could unintentionally find themselves having to register with the SEC if their investor pool grows to over 2,000 people.
Experts say you shouldn’t expect many growing companies to take this path right away. Companies are finding willing investors in the traditional private markets, at very founder-friendly valuations.
“I don’t think there will be immediate adoption of Reg. A+ in the startup ecosystem,” said Shriram Bhashyam, founder of EquityZen, a marketplace for private company investments. “Currently, access to capital via private markets is plentiful, especially with mutual and hedge funds increasing investing in late- and growth-stage. And this capital is available at favorable valuations… Until that spigot dries up, there’s not much incentive to be an early adopter of Reg. A+.”