Crowdfunding Legal Limit Too Low for Intended Beneficiaries
Regulation Crowdfunding (Reg CF), a regulation that grew out of the Jumpstart Our Business Startups (JOBS) Act of 2012, was designed to allow non-accredited investors to invest relatively small amounts in startups. But the regulation seems not to be serving its purpose, according to people in the fintech investment community.
Why is this? Because the maximum amount that can be raised in a single year under Reg CF is limited to $1,070,000.
“I’ve had clients consider [using] Reg CF, but when they see that they can only raise $1 million, they say it’s not worth the trouble,” said James P. Dowd, CEO of North Capital, a Salt Lake City-based broker-dealer that helps private companies raise money.
“I’m not anti-regulation at all, but if the reward is not there, people won’t go through the trouble,” Dowd said. “Let’s have regulations that are appropriate for the need.”
Dowd said that a small startup seeking funding for a series A round is typically looking to raise around $10 million. The $1.07 million cap for Reg CF is therefore inadequate. A startup’s other options for raising money under the JOBS Act include regulations D, S and A+. Dowd said that Reg D is the most common. It involves very little paperwork and is less expensive compared to other options. Reg S applies only to offshore investors and Reg A+ makes sense only if the startup is looking to raise $20 million or more because this option is costly to file.
All of these options require that investors be accredited, which translates to investors being wealthy. (Accredited investors must have a net worth of at least $1,000,000, excluding the value of one’s primary residence). On the other hand, if an entrepreneur opts to raise money through a Reg CF, investors need not be accredited, although there are still restrictions on how much they can invest, given their income.
Reg CF allows entrepreneurs to access a wider pool of investors. And Dowd, along with others in the investment community, believe that the current $1.07 million annual cap should be raised to as high as $20 million to satisfy the need of entrepreneurs who are looking to raise more money.
“The infrastructure for the crowdfunding industry has been tested and is ready to expand,” said Douglas S. Ellenoff, partner at Ellenoff Grossman & Schole who is an expert on crowdfunding.
Ellenoff said that there was much fear among regulators following the 2012 JOBS Act that crowdfunding would be ripe for fraud. But the fraud didn’t happen. He believes in raising the Reg CF cap to allow the crowdfunding industry to mature. And he believes that once the cap is raised, more substantial companies will start to use crowdfunding which further legitimate it as a valid way of raising money.
North Capital was founded by Dowd in 2008 and provides an array of financial advisory services to its clients. In addition to its Salt Lake City headquarters, it also has offices in Benicia, California and McAllen, Texas.Last modified: July 25, 2018
Todd Stone was a reporter for deBanked.