Game-Changer: SEC Reforms Regulation Crowdfunding - Trade Stocks

Game-Changer: SEC Reforms Regulation Crowdfunding

By Tue, Apr 13, 2021

On March 15, 2021, the Securities and Exchange Commission (SEC) issued important reforms to Regulation Crowdfunding, making it easier than ever for smaller companies to raise needed capital by offering and selling securities through crowdfunding.

Access to capital is a predictive indicator of a company’s success. Historically, however, smaller companies had a much harder time raising capital than larger companies.

Large corporations can more easily issue tens of millions of dollars in stock and corporate bonds. Smaller corporations or startups often have trouble raising a few million dollars.

The JOBS Act of 2016

In 2016, the JOBS Act was passed allowing anyone to invest as little as $100 in smaller companies. This made it easier for these companies to raise capital directly from individual investors through crowdfunding.

As a result, a new world of opportunities, that were never available before, opened up for both smaller companies and individual investors alike. These new laws, however, were flawed in many regards and deterred many startups from using them.

With the new reforms by the SEC, crowdfunding is now more feasible for many more companies. The SEC stated in part, “We believe that the amendments adopted in this release will enable small businesses generally to access capital through exempt offerings more effectively and we encourage further specific, tangible suggestions for action by the and are committed to continued engagement on this topic.”

Improvements to Regulation Crowdfunding

The most important improvements to the law allow companies to raise more money faster. They also allow investors to place a bigger stake in their favorite companies.

Companies can now raise up to $5 million from unaccredited investors.
Under the old law they could only raise a little over $1 million. The increase to $5 million should allow later-stage companies to raise more money from their customers. In addition, individual investors now have access to more direct investment opportunities.

Companies can begin raising capital immediately
Under the old law, companies had to jump through a number of accounting and compliance hoops before they could even find out if investors were interested in their offering. Now, they can request reservations right away while doing the necessary financial and legal preparations at the same time.

Investors can invest more money
The previous version of the law restricted investment by individual investors. Now they can invest the “greater of” their net worth or income per year. Specifically, investors are allowed to invest 10% if their net worth or income is above $100,000 or 5% if it’s under $100,000. Accredited investors are no longer under any investments limits whatsoever.

The Bottom Line

The new reforms to Regulation Crowdfunding will allow many more people to become angel investors in their favorite companies. With as little as $100, anyone can get started. The reforms will also likely encourage more companies to open up investment opportunities with them.

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