Summary: In November 2020, the SEC announced new rules that would allow greater access to capital for start-ups and private investing. These changes recently went into effect and it’s already proving to be a positive for companies and investors.
When you hear the term “crowdfunding” what comes to mind? Most readily you might think of Kickstarter or GoFundMe, right? It’s quite possible you may have even participated in a crowdfunding campaign at some point. The term crowdfunding at its simplest means to gather small amounts of money from many individuals (“the crowd”) to fund a new project, cause, or business venture.
This form of raising money allows start-ups and small businesses access to capital outside of more traditional routes such as venture capital and makes it possible for a different range of investors. On the flip side, it also allows investors to invest in companies or ideas they believe in while feeling a part of the early action, even if they aren’t an accredited investor (though the SEC changed these rules recently as well) or waiting until a company goes public, at which point the financial returns can be more limited.
Regulation Crowdfunding (Reg CF) was adopted as part of Title III of the JOBS Act in 2016. Initially, the amount of money a start-up or business could raise through investment crowdfunding under the Reg CF guidelines was $1.07 million. In November of last year, the SEC made a bold move and updated several rules including increasing the crowdfunding limit to $5 million per 12-month period. This is a huge move for entrepreneurs trying to get their businesses off the ground, as access to capital is one of the major concerns of small businesses today between payroll, inventory, normal business expenditures such as lawyers, accountants and the like, capital is a need that can rise quickly! Having the ability to raise money in this way can be a game changer for start-ups - in fact we here at Worthy successfully used crowdfunding ourselves in our early stages of growth as well!
Companies and investors have been eagerly awaiting for this new rule to go into effect and the results have been outstanding. For example, an online platform for creators to sell and get paid for their work, Gumroad, made headlines by hitting the new $5 million dollar cap in just 12 hours with over 7,600 retail investors, showing that building community around your company while having a proven business model is one way to create success when it comes to using crowdfunding to raise capital.
Another update the SEC provided in the investment crowdfunding arena that didn’t make as many headlines, but still provides growing companies and retail investors a big opportunity, is with Regulation A+ (this is the regulatory framework Worthy Bonds uses as well). Again, when this law was originally adopted as part of the JOBS Act, it allowed companies to raise up to 50 million dollars within a 12-month period, and while this is a nice sum, some companies felt that it was still too limiting even with the benefits Reg A could provide.
Under the new update, companies are now able to raise up to 75 million within a 12-month period. As mentioned, access to capital is a major issue in a company's ability to effectively and successfully grow. These larger limits give more established companies the resources to hire crucial team members, execute marketing campaigns, and secure inventory and operations needs. And for Worthy, since we use RegA+ for our bonds, the new higher limit means we shouldn’t sell out as rapidly as we have in the past!
This limit increase is especially favorable for real estate investments so they can offer even more opportunities without investors needing large sums of money to invest. Real estate is an alternative asset that is not as common for many retail investors to hold - given the usually high price of investing in the sector - but it’s an attractive way to diversify your portfolio so it’s exciting to see more and more of these companies using RegA+ to bring more affordable investments to the public.
One company in the healthcare and wellness space recently took advantage of the newly raised limits. Emotional Intelligence Ventures, who specializes in all-natural psychedelic medicine development, recently announced that it received qualification for its Reg A offering. Founder and CEO, David Nikzad, commented that he has been given the opportunity, and reaped the rewards of, investing in companies at the early stages such as AirBnb and that this Reg A+ qualification will allow his company to remain “committed to the unaccredited investor.”
Nikzad stated: “I’m really passionate about democratizing investment opportunities so any investor can reap the rewards, and take all of the risks, of early investment in game-changing companies.” We completely agree.
Giving growing companies the opportunity to include everyday investors can be a win-win and what this really means for you is the opportunity to grow your wealth, invest in companies aligned with your values and grow with them, close the wealth gap and create a Worthy future for you and your family.
PS: The recent -- and growing popularity of NFT’s could be running afoul with the powers that be. Are they a security? Are they not? One way NFT’s might be able to keep everyone happy is being sold under the Reg CF or Reg A+ terms. Stay tuned...we’ll be watching to see how this plays out.