Social Enterprises Benefit From Adjustments to Regulation Crowdfund Limits
Last month, the Securities and Exchange Commission (SEC) made inflation adjustments to Regulation Crowdfund (Reg CF) investment limits and raise limits. A summary of these changes can be found here. These changes affect enterprises raising capital and investors.
Changes for Issuers
For businesses, the limitations on how much capital can be raised in Reg CF offerings are dependent on what kind of financial statements the business has prepared. Businesses with financial statements that have been certified by its chief executive officer can now raise up to $124,000 (up from $107,000). Companies that have financial statements that are reviewed by an independent accountant may raise up to $618,000 (up from $535,000) or up to $1,235,000 (up from $1,070,000) if it is the company’s first Reg CF raise. If a company has audited financials, it may raise up to $5,000,000 (this limit is unchanged).
Changes for Nonaccredited Investors
Investors are either considered accredited (high net worth or high income) or nonaccredited depending income or net worth standards. Reg CF limits how much nonaccredited investors can invest based on the investors’ income or net worth. These limits were also adjusted by the SEC. Currently, a nonaccredited investor may invest $2500 or 5% of their annual income or net worth if their annual income or net worth is less than $124,000 (up from $107,000). A nonaccredited investor, whose annual income and net worth are at least $124,000 (up from $107,000), may invest the greater of 10% of their annual income or net worth up to $124,000 (up from $107,000).
Impact of These Changes on Social Enterprises
Our clients are all social enterprises of one type or another. For these types of businesses, the changes described above allow more money to be raised without spending more money on preparing financial statements. Additionally, many social enterprises rely significantly on investments made by their community, which often includes many nonaccredited investors. These community investors can now invest more into enterprises that match their values.
Reg CF Client Offerings
See how some of our current clients are utilizing Reg CF:
Cubo Beverages is offering up an alternative and sustainable pod-based juice machine that can deliver restaurant-quality smoothies, coffee, tea, juices and wellness drinks with all natural ingredients in under two minutes.
Freakin Fitness is raising capital to fill the gap between large-chain traditional gyms and small community-based functional fitness centers.
Dishquo has developed a meal planning nutrition app that offers customized meal plans, automated grocery lists, 3000+ healthy recipes, health and wellness tools and more.
The Karisha Community Center for Wellness in Austin, Texas is a whole person healthcare community center designed to address healthcare inequities and disparities reinforced by the current model of medical care by shifting from sick care to whole person collaborative care.
Momentors is a software platform developed to provide the right expert information at the right moment. In three simple steps, individuals can get solutions to real-world problems from verified experts.
Regulation A Regulation A (also call Reg A or Reg A+) was revised in March 2015 in order to implement Section 401 of the Jumpstart Our Business Startups (JOBS) Act. Reg A is an exemption from registration for public offerings, but the disclosures required under this...
Suppose your organization needs growth capital and you’ve talked about doing a securities offering of some sort. But you’re reluctant to commit the time and resources that it takes to gear up for a securities offering without having some confidence that it will be successful. What you’d really like to do is to put some feelers out there, at a minimal compliance cost, to see if potential investors would be interested. Then you could make a better-informed decision.
This is what we call “testing the waters.” In addition to helping your organization decide whether to launch a securities offering, a testing-the-waters campaign could potentially also help you choose from among several capital raising strategies.
For example, if you find there is strong interest among accredited investors but less interest among non-accredited investors, you may opt for a Rule 506 offering targeted to accredited investors. If you find the opposite, you might choose a Regulation Crowdfund offering or a direct public offering. You might also gauge interest among out-of-state investors, which can help you decide whether to do an intrastate offering or a multi-state offering.
Legal Strategies for Testing the Waters
It has always been possible for organizations to speak privately with potential investors to test the waters. But the last few years have given us some new ways of doing this publicly. For example, the expanded Regulation A, which went into effect in 2015, has its own testing-the-waters provisions in Rule 255, for organizations contemplating a Reg A Tier 2 offering.
Then last November, an SEC final release gave us two new testing-the-waters pathways: Rule 206 for organizations contemplating a Regulation Crowdfund offering; and Rule 241 for organizations that haven’t yet decided on an offering strategy.
This trio of testing-the-waters rules has some similarities. All of them generally require the following:
No money may be solicited or accepted when testing the waters.
Testing-the-waters materials must state that:
No money is being solicited or will be accepted;
Offers to buy securities will not be accepted; and
Indications of interest are non-binding.
The issuer must keep a copy of testing-the-waters materials, and any such materials that are made publicly available (or otherwise used in general solicitation) must be included with a subsequent filing under Reg A or Reg CF.
There are some important differences, which we’ll break down in the table below, to make it easy to compare them. But first, we’ll add one more: Rule 506(c) under Regulation D is not designed as a testing-the-waters strategy, but rather as a strategy for raising capital from accredited investors (with verification). But it can be advertised, and that opens the door for its use as a public testing-the-waters strategy.
Comparison of Testing-the-Waters Strategies
With four testing-the-waters options now, it can get a little confusing. So here’s how we break them down:
Subsequent offering strategy
Reg A Tier 2 only
Reg CF only
Requires standard TTW disclosures
Can take investment money
Yes, but only from investors verified as accredited
Other key elements
May do TTW before or after filing Form 1-A
May not do TTW after filing Form C
May not use Rule 241 after deciding on a strategy
Requires 30-day waiting period after TTW to avoid integration with any subsequent offering
We’ll draw attention to one critical differentiator among these rules: preemption of state laws. Most testing-the-waters rules preempt state laws, which means that an organization can safely test the waters under those strategies, even publicly on the organization’s website, without worrying about violating state laws.
But Rule 241, the testing-the-waters rule for organizations that have not decided on an offering strategy, does not preempt state law. Many (and perhaps most) states’ securities laws do not permit testing-the-waters publicly, or allow it under only limited circumstances. So an organization should be very cautious in planning a Rule 241 testing-the-waters campaign so as to ensure it does not inadvertently violate state laws. As a practical matter, Rule 241 may not be very usable for this reason. Instead, organizations who want to test the waters but have not yet settled on either Reg A or Reg CF as their intended offering strategy may be better off using Rule 506(c).
With all of these strategies, there are some important nuances, and no organization should test the waters without first getting legal advice. Naturally, this discussion should be regarded as informational only and not as legal advice. If you’d like to talk with us about testing the waters or other securities strategies, don’t hesitate to reach out to us.
Is your business ready for more funding? Watch our webinar replay on Regulation A+. Learn how to identify when your business is ready for a larger raise, receive an overview of the regulatory process for Reg A+, and hear how Reg A+ offerings can be promoted.
Crack open your notepad, listen in, and email us with any questions you have about the Reg A+ process at email@example.com.
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