Editor’s note: Our Monday Startup Spotlight this week shines on crowdfunding. Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law discuss what types of offerings investors are investing in and recent changes to the size of Regulation CF Crowdfunding offerings.

JIM:  People always say: “Show me the Money.”  The media often focuses on IPOs and other registered public offerings.  But in August 2020, the SEC reported to Congress that businesses raised a lot more money in exempt private offerings than in public offerings – about $1.2 trillion for registered offerings and more than $1.5 trillion for exempt offerings.

BENJI:  So, the real money is in private offerings.

JIM:  Yep. Benji, can you give a breakout about how much businesses raised in each type of exempt offering.

BENJI:  Businesses don’t report every dollar they raise, but the SEC reported to Congress in August 2020 that during 2019 businesses doing Regulation D offerings raised:

  • Almost $1.5 Trillion using SEC 506(b)
  • Over $66 Billion using Rule 506(c)
  • $228 Million using Rule 504

Exempt offerings during 2019 outside Regulation D raised:

  • Over $1Billion using Regulation A+ (SEC Report to Congress August 2020)
  • Over $100 Million using Regulation CF (reported by Crowdwise.com)

So, SEC Rule 506(b) still dominates the playing field just like it always has.

JIM:  Yes, but that number is deceptive.  Institutional investments dominate Rule 506(b) offering numbers.

About 75% of the money raised using Rule 506(b) was raised by investment funds (hedge funds, venture capital, real estate etc.)  Another big part of the Rule 506(b) offerings were these funds re-investing money in mature companies and real estate properties.  Likewise, Regulation A+ is primarily used by businesses with established revenue streams.

So, for pre-money startups, small businesses struggling to raise expansion capital and others raising money from non-institutional investors, the action is in Rule 506(c) offerings and Regulation CF Crowdfunding – both of which allow advertising and other general solicitation – and Rule 504 offerings.

BENJI:  Yes, Rule 506(b) works well if you already know a bunch of big money investors.  For everyone else, the other rules are more important.

JIM:  Capital raising experts (like us) have long argued that the SEC should issue new rules.  On November 2, 2020, the SEC finally tweaked many rules to create efficiencies for both businesses and their investors.

Are these changes a big deal?

BENJI:  How does a 500% increase in Regulation CF Crowdfunding offering annual limits sound?  Crowdwise.com is predicting the changes will increase Regulation CF offerings to $500 Million within the next year.


BENJI:   Yes, by February 2021, you’ll be able to raise $5 million per year in Regulation CF offerings.  Regulation A offering limits also increased to $75 million and Rule 504 offerings increased to $10 million.  Of course, Rule 506(c) continues to have no limits on how much you can raise.

JIM:  With that amount of money, it sounds like 2021 will be a busy capital raising year.  Were there any other changes?

BENJI:  In Regulation CF Crowdfunding offerings, there will no longer be a limit on how much each accredited investor can invest.  Non-accredited investors will be able to invest up to the greater of (i) $107,000 or (ii) 10% of the greater of (x) annual income or (y) net worth, if both annual income and net worth exceed $107,000.  If annual-income or net worth is less than $107,000, the limit is the greater of (i) $2,200 or (ii) 5% of the greater of (x) annual income or (y) net worth.

This change for individual investors may attract more investors to Regulation CF offerings.  Many investors don’t want to make micro investments.  It’s not worth their time to keep track of a lot of small investments.

JIM:  I also expect the with larger offerings permitted, more companies that have growth potential will make Regulation CF offerings instead of relying solely on Rule 506.  If better quality companies begin using Regulation CF, that will attract more investors to look at Regulation CF offerings.

BENJI:  So, that’s our report about the numbers.  How much has been raised and how much you will be permitted to raise in the future.

JIM:  But what you are allowed to raise only matters, if the rules about how you are allowed to sell your deal makes sense.

BENJI:  We are often asked:  Will Crowdfunding replace venture capital funds?  The numbers clearly indicate that venture capital is here to stay.  Some businesses need $10 million or more and benefit from the experience the best venture capital funds bring to the table (so called smart money).  Crowdfunding can’t deliver that now.  So, what’s your take on the effects of these changes?

JIM:  The new bigger and better Regulation CF is creating a lot of buzz.  But you can’t pay your bills with buzz.

Pitchbook recently touted Regulation CF as an alternative to venture capital for $2 million financings for seed and early stage companies.  I think that’s a viable goal these days.

But our experience is that you need to know how to market your deal to raise that kind of money.  Money from investors doesn’t just fall into your lap.  Selling is where the action is.  Part of selling is using technology to network with people to grow your crowd of followers, but how you do that is governed by SEC rules.

In our next article we will discuss the SEC’s new rules for how you sell, including conducting multiple offerings, demo days and pitch events and conducting market tests before you do your offering.

(C) Innovate Capital Law