The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”

Crowdfund Insider | | June 20, 2019

RegCF SEC report - The SEC Publishes Report on Reg CF: “The number of crowdfunding offerings as well as the total amount of funding during the considered period was relatively modest”The Securities and Exchange Commission (SEC) has published a statutory report on Regulation Crowdfunding commonly referenced as Reg CF. The mandated report must be forwarded to Congress three years after Reg CF rules became effective (May 2016).

Reg CF is the smallest of three federal “crowdfunding” exemptions allowing issuers to raise just $1.07 million from both accredited and non-accredited investors.

According to the report authors:

“the number of crowdfunding offerings, as well as the total amount of funding during the considered period, was relatively modest.”

The report tallies activity under Reg CF from May 2016 to December 31, 2018. At the end of the period, there were 45 active Portals and 9 Broker-Dealers which had participated in at least one Reg CF offering.

See:

Three platforms accounted for two-thirds of all initiated offerings and proceeds raised.

SEC: the number of #RegCF #crowdfunding offerings, as well as the total amount of funding during the considered period, was relatively modest Click to Tweet

According to the SEC:

  • Between May 16, 2016, and December 31, 2018, there were 1,351 offerings, excluding withdrawn filings, seeking in the aggregate a target, or minimum, amount of $94.3 million and a maximum amount of $775.9 million.
  • Of the completed offerings, approximately $107.9 million has been raised during the period.
  • 29 offerings reported raising at least $1.07 million from May 16, 2016, through December 31, 2018
  • The typical offering was small and raised less than the 12-month offering limit. The median target amount sought was $25,000 and the median maximum amount sought was $500,000.
  • Pointing to an external report, the SEC notes that the total number of investors in successful offerings increased from 77,558 in 2017 to 147,448 in 2018

Regarding the cost of launching a Reg CF campaign, the SEC states:

“According to the survey, the average issuer employed three people who collectively spent 241 hours to launch a crowdfunding campaign. Based on the survey estimates, the total cost of creating a campaign page, issuer disclosures, film, and video, and hiring a marketing firm, a lawyer, and an accountant amounts to approximately 5.3% of the amount raised.”

The most costly portion of the campaign preparation has to do with disclosure. This cost, on average, $6218 or a time allocation of 86 hours, according to the SEC.

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The report mentions that cost and complexity have impacted this sector of online capital formation. The authors point to previous SEC Small Business Forums where participants have made recommendations to improve Reg CF for the past few years but to date, no action has been taken on these recommendations.

The document includes some anecdotal feedback from crowdfunding platforms. For example, one platform states that “while few offerings reach the current limit, many issuers choose not to rely on the crowdfunding exemption because the limit is too low.”

Another intermediary thought the current cap was ok.

But several respondents stated that the offering limit should be higher, recommending limits from $5 million to $20 million.

Negative Selection Bias?

Importantly, the SEC report states:

“Some of these market participants stated that the existing offering limit may deter some high-quality, high-growth issuers with substantial financing needs from relying on Regulation Crowdfunding, thereby lowering the average quality of issuers in the Regulation Crowdfunding market. One intermediary respondent stated that raising the offering limit could attract more issuers and expand opportunities for non-accredited investors.”

Many platforms have crafted a workaround to bypass constricted Reg CF rules regarding investment caps and investors limitations.

It is now commonplace to run two concurrent offerings: a Reg CF and Reg D side-by-side for accredited investors. But some intermediaries told the SEC this was “unnecessarily confusing to investors and more costly to issuers.”

The report says that no enforcement actions have been taken against Reg CF issuers by the SEC but FINRA has taken 4 separate actions against a funding portal and NASAA says a small number of actions have been taken by state regulators.

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A fair amount of review is given to the development of (or lack of) a secondary market for Reg CF issued securities. To date, no platform has been able to successfully maintain a marketplace for securities as the size of the market is simply too small and affiliated costs too high.

The important concept of a Special Purpose Vehicle (SPV) for aggregating investors into a single entity is addressed. The report cites the potential investor protections an SPV structure could provide. An SPV could facilitate a vehicle where “small investors [could] invest alongside a sophisticated lead investor who may negotiate better terms, protect against dilution by negotiating during subsequent financings, mentor the company, and represent smaller investors on the board.”

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