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The Future of Startup Investing Is Here: March 15th’s Regulatory Changes Are Live!

March 15, 2021 6 min read

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The Future of Startup Investing Is Here: March 15th’s Regulatory Changes Are Live!

Today marks a historic day for StartEngine and the equity crowdfunding industry. On March 15th, new regulatory changes go into effect that have big ramifications for StartEngine and for everyday investors who want to invest in startups.

TLDR: starting March 15th, companies can raise more money via equity crowdfunding—companies can raise up to $5M via Reg CF and $75M via Reg A+ in a 12-month period—and individual investors can invest more money than they were previously able to.

Why is this important?

In 2020, a record 10 million+ new brokerage accounts were opened. More people are investing than ever before, but the public only has access to a limited number of investment opportunities.

There are nearly 6 million small businesses in the US, and everyday investors historically only had access to ~4,000 publicly-traded companies. That number isn’t changing very quickly. In 2020 only 480 companies went public, yet the US Census Bureau calculated that new businesses are forming at the highest rate in 13 years.

There is a real disconnect between the millions of businesses in the US and the few thousand companies that have access to the large amounts of capital needed to become a public-reporting company. This creates a problem: the general public doesn’t have access to invest in the vast majority of US companies. Historically only institutional investors and wealthy accredited investors had access to invest in private companies.

In turn, this problem contributes to a broader issue. The wealth gap in the US is the largest it has been in several decades. The gap between the richest and the poorest families more than doubled from 1989 to 2016, and COVID-19 has widened that gap further.

The good news is that the times are changing. At StartEngine, we have created a platform open to everyone. Startup investing is no longer gated behind the doors of angel and venture capital communities. Anyone can invest in a startup on our platform.

Today’s regulatory changes improve equity crowdfunding for both entrepreneurs and investors and make this emerging space more viable as an alternative to traditional capital formation. Let’s take a look at what these March 15th changes are.

Companies can raise more

Starting March 15th, the maximum amount companies can raise in a given 12-month period has increased.

  • The Regulation Crowdfunding limit has been raised from $1.07M to $5M.
  • The Regulation A+ limit has been raised from $50M to $75M

Since January 2020, we’ve had 49 companies reach their $1.07M funding goal. These new limits mean many of those companies could have continued raising up to $5M (note: an audited financial statement is required to raise up to $5M). In fact, many companies that are oversubscribed and still live on StartEngine have increased their maximum funding limit today to allow their waitlisted investors to participate!

We believe these higher limits may attract more companies to equity crowdfunding. In particular, with the new $5M max, we see Regulation Crowdfunding as an even better fit for companies looking to raise their seed funding round—the average seed funding round for a company was $2.2M in 2020.

And with the new $75M max, we may attract more mature companies that previously considered the $50M 12-month limit to be too low.

Investors can invest more

Not only can companies raise more, but investors can invest more too. The March 15th changes mean that when investing in Regulation Crowdfunding offerings:

  • Accredited investors no longer have investment limits and can invest as much as they want in Regulation Crowdfunding offerings
  • Non-accredited investors can use the greater of their annual income or net worth when calculating their investment limits (previously investors’ limits were calculated using the lesser of the two).

With these increased limits, investors can diversify their portfolio with more investments in companies raising capital via Regulation Crowdfunding, and the lack of limits for accredited investors mean that institutional investors can more easily invest alongside everyday investors. How cool would it be to live in a world where venture capitalists and everyday investors can invest in the same company at the same terms?

Companies can test the waters under Reg CF

Through Regulation A+, companies can “test the waters” (TTW) and launch a campaign to gauge the public’s interest in a potential offering and provide investors with the opportunity to reserve their investment. Starting March 15th, companies can now “test the waters” under Regulation Crowdfunding too.

This means that companies can launch a TTW campaign page in a matter of days at very low cost, and based on the interest from their community decide whether to use Regulation Crowdfunding or Regulation A+, or whether equity crowdfunding is the right fit. And if the company receives a positive response, they can finalize their offering documentation and launch a few weeks later and accept those reserved investments.

We believe that this change will encourage more companies to explore raising from the crowd because it lowers the barriers to entry, and some companies will offer exclusive perks to reservation holders to reward their early participation. Discover companies testing the waters on our Explore page!

COVID relief, demo days, and SPVs

On top of the changes above, there are a few other things worth noting.

  • The SEC has extended certain COVID-relief measures of Regulation Crowdfunding for an additional 18 months
  • Companies are now permitted “demo day” communications that will not be deemed general solicitation or general advertising
  • Special Purpose Vehicles are now permitted in Regulation Crowdfunding offerings.

What does all of this mean for StartEngine?

At their core, these changes mean two things: companies can raise more money, and investors can invest more money. Fundamentally, StartEngine can also grow faster.

With these changes, we can attract more entrepreneurs from a wider variety of backgrounds, and individual investors are better able to participate in more deals with their increased annual investment limit.

We strongly believe these changes help make equity crowdfunding a more viable alternative to traditional sources of funding for entrepreneurs and accelerate the industry’s growth and put it on the map for millions of investors around the world who have yet to invest in a startup.

Startups will one day be a part of every single investor’s portfolio, and StartEngine will be there to help people to discover new opportunities.

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This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

 

Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

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