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Doug Ellenoff on US Reg CF Increasing Issuer Caps to $5 million: Investment Crowdfunding Will Challenge Traditional Venture Capital

Crowdfund Insider | JD Alois | Jun 15, 2021

Doug Ellenoff - Doug Ellenoff on US Reg CF Increasing Issuer Caps to $5 million: Investment Crowdfunding Will Challenge Traditional Venture CapitalThe US investment crowdfunding industry received a boost this year as the Securities and Exchange Commission (SEC) adjusted the securities exemptions that platforms and issuers utilize to raise growth capital online. Along with other improvements, key changes include the adjustment of Reg CF (Regulation Crowdfunding) to allow for the funding of up to $5 million – from a previously anemic $1.07 million, and a boost to Reg A+ to up to $75 million from $50 million.

Many, if not most securities crowdfunding platforms, utilize the three main crowdfunding exemptions – Reg CF, Reg A+, and Reg D 506c. Reg D, currently available only to accredited investors, remains the most popular securities exemption in the US powering a $1 trillion private capital market.

Recently, Crowdfund Insider connected with Doug Ellenoff, Managing Partner of Ellenoff, Grossman, and Schole – a top legal firm engaged with the Fintech sector, as well as a leading SPAC advisor, for his thoughts on the future of online capital formation. Ellenoff has been engaged with securities crowdfunding since before the JOBS Act of 2012 emerged as the legislative path to legalize raising capital on a digital platform. Counsel to the Association of Online Investment Platforms, and a regular suspect within the halls of Congress and financial regulatory agencies, Ellenoff has long been an advocate for the emerging industry. CI asked Ellenoff for his expectations for the industry in the coming years.

Reg CF received a material boost from the SEC in March by increasing the funding cap to $5M. Beyond more money, how will this impact the ecosystem? More quality firms? What else?

Doug Ellenoff: Limiting Reg CF to a million served several regulatory functions, it contained the severity of any problems that may have arisen with investors had the program had inherent issues, it marginalized its utility to issuers and as a result stigmatized it as being “rink dink”. This caused large law firms, accounting firms, and investment firms to explain it away as something without much use and more of an amusing fad.  The miscalculation though in my judgment was that entrepreneurs aren’t dissuaded by passive-aggressive roadblocks, they are emboldened, and used the 5 last years to demonstrate that the stated concerns for fraud were without statistical merit.

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If regulators and investor protection advocates were self-reflective, they’d go back and remind themselves of their standard narratives in 2012 and learn how misguided they were in frustrating the landmark legislation.  The peddling of concerns of fraud were never legitimate for Reg CF and merely a tactic.  Raising the $1mm threshold amount to $5mm is a simple and clear statement that the industry from the platform operators to the entrepreneurs have conducted themselves admirably because if they hadn’t, the program wouldn’t be poised for continued and expansive growth.

The $5mm cap will attract bigger and more interesting dealflow, addressing larger addressable markets, and likely but certainly no guarantee, quicker and larger exits.

Besides more entrants to becoming platforms, I’d expect more established capital markets professionals and firms to tiptoe in as well.  At $1mm, you are competing directly with “friends and family” funding rounds, at $5mm you are becoming more competitive with smaller venture firms and family offices. It’s exciting and validating and the trajectory couldn’t be more clear.

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NCFA Jan 2018 resize - Doug Ellenoff on US Reg CF Increasing Issuer Caps to $5 million: Investment Crowdfunding Will Challenge Traditional Venture Capital The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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