The Latest on Crowdfunding and Reg A+

By: Marianne Hudson, ACA Executive Director

A few weeks ago I attended a meeting of state securities regulators with leaders of different parts of our securities markets in the US and Canada to compare notes.  Not only do I admire the regulators for holding meetings such as this, but I learned a great deal about some of our newest types of securities – equity crowdfunding for everyone and Regulation A (Reg A+ for short).

By agreement of all attendees, I can’t share some specifics of who said what, but let me share some of my general takeaways from the NASAA Capital Formation Roundtable about equity crowdfunding:

  • Anyone can invest in equity crowdfunding offerings via two mechanisms:  1) at the federal level “Regulation Crowdfunding” opened for American citizens on May 16 and 2) “intrastate crowdfunding” allows for state residents to invest in businesses in that state.  Currently 34 states have approved intrastate crowdfunding and 29 are currently online

  • 11 platforms had been approved by the SEC to offer equity crowdfunding offerings as of June 24.  You can see 10 of those here.  A few of the approved platforms are also ACA members that also separately have platforms for accredited investors only.  As an aside, I look forward to an easily found website with this information in the future, after spending more time than you’d think hunting for it. Don’t investors and issuers deserve such an approved directory for their own protection?

  • So far, there hasn’t been as much investment activity in these two types of crowdfunding as I would have thought.  At the intrastate level, there have been 177 filings since 2011 in the first state with crowdfunding rules.  And what state would you think that would be? … Kansas.  In the first five weeks of crowdfunding at the national level, 41 offerings were filed.

  • It sounded like the state-type crowdfunding was on a path for growth, with many states just getting started.  At the federal level, I got the insight that entrepreneurs and investors are holding back because of confusion about how much information issuers can provide about their offerings.  SEC rules do not allow for advertising of offerings outside of the crowdfunding platforms, but issuers can provide some basic information.  As I wrote this Spring, “Crowd” doesn’t mean fully public.  Congress is working on some “fixes” to crowdfunding, including this issue. 

  • What kinds of companies are raising money on state and federal platforms?  A large majority are consumer and retail oriented - pubs, restaurants, hair salon, dog groomer, etc., although I also see an angel fund (which we’ll have to investigate later).  But it was also interesting to learn that real estate projects were also a big component.  This may be why the Fix Crowdfunding Act would raise the maximum raise from $1 million to $5 million.  Notably not mentioned much are technology and life science companies.

  • State regulators have noticed that many of the equity crowdfunding deals are structured not as equity, but as debt, membership units, or profit or revenue sharing.  They noted that many of these deals are “homegrown, local, community-based models” and that the issuers are not candidates for the type of exits expected in other types of equity investing. It makes sense to me then that many of these offerings need alternative deal structures.

The JOBS Act also allowed for new Regulation A+, which allows anyone to invest in offerings of up to $50 million with some different specific rules.  Here are a few tidbits on that market:

  • There are two “tiers” of Reg A+: tier 1 offerings are up to $20 million and require approval by each state in which the offering is sold and tier 2 offerings are up to $50 million and are approved by the SEC.

  • Clearly the tier 1 deals have a more complicated approval process, since multiple state regulators are involved.  NASAA has created a coordinated review process to remove some of the red tape.  Still, this hasn’t been a popular route: 11 deals have filed since 2014. Five of those were approved, two are pending, and four were withdrawn. One of the withdrawn offerings went to the tier 2 space, which has considerably more activity.  More than 100 offerings have been filed for tier 2, seeking more than $2 billion.

We’ll keep an eye on these relatively new types of funding markets as they progress and provide angel investors with the best information we have.  Later this year we also plan to offer webinars on equity crowdfunding to build angels’ knowledge and be able to ask questions.