• George Cook

What do the new Reg CF changes mean for small business investors?

Whether you are a veteran Regulation Crowdfunding (Reg CF) investor or you are just discovering the emerging industry, you may have heard some exciting buzz about pending updates to the crowdfunding rules.

When do these changes go into effect?

After months of research followed by an open comment period, the Securities and Exchange Commission officially filed several key regulatory updates to the Federal Register on January 14, 2021. The updates are set to go into effect on March 15, 2021.

What are the Key Changes to Reg CF Investment Rules?

  1. Expanded investment caps

  2. Uncapped Investments for accredited investors

  3. Eased "testing the waters" rules

  4. Larger deals

1. Expanded Investment Caps

The rule change that will impact the most investors, and most immediately improve the experience of investing in Regulation Crowdfunding campaigns are the updated investment caps. The old rules are complicated, but here is the breakdown:

  • Anyone who is 18 years or older and has a U.S. tax identification number (such as a social security number) is eligible to invest $2,200 in a rolling twelve-month period

  • If either your income or your net worth was below $107,000 then your investment cap was historically based on 5% of the lesser of your income or net worth (if that value is less than $2,200, then your investment cap would be $2,200)

  • If both your income and net worth were greater than $107,000, then your investment cap was historically based on 10% of the lesser of your income or net worth

With the updates, the cap formula remains fairly complicated but there is one critical change that will benefit many investors. Instead of the “lesser” of your income or net worth, the cap will now be based on the “greater” of your income or net worth:

  • Anyone who is 18 years or older and has a U.S. tax identification number (such as a social security number) is eligible to invest $2,200 in a rolling twelve-month period

  • If either your income or your net worth is below $107,000 then your investment cap will be 5% of the greater of your income or net worth (if that value is less than $2,200, then your investment cap will be $2,200)

  • If both your income and net worth are greater than $107,000, then your investment cap is will be based on 10% of the greater of your income or net worth

This is an important change to many existing or would-be Reg CF investors. For example, if you recently graduated from college or graduate school, you may have an income that gives you the flexibility to start investing, but perhaps your net worth is still modest (or even negative with those pesky student loans!) - these changes open up more opportunities to use Regulation Crowdfunding investments as an opportunity to help build your wealth over time.

Alternatively, perhaps you are recently retired with a modest income but a healthy nest egg. You may be looking for alternative investments, especially fixed-income offerings like those on Honeycomb, but were restricted by the old caps.

2. Uncapped Investments for Accredited Investors

Beyond the change to the investment cap that will impact many millions of non-accredited investors, there is also exciting news for accredited investors in the updated Reg CF rules. Remember, the definition of an accredited investor is generally someone with a net worth (excluding their primary residence) of $1,000,000 or an annual income of $200,000 ($300,000 if filing jointly) for the most recent two years.

Prior to change accredited investors were historically capped on how much they could invest annually by either the calculation highlighted above, or $107,000 per year, whichever was lower.

Under the updated rules, accredited investors will no longer have an annual investment cap and will be able to treat Reg CF as any other asset class and may consider making it a more significant piece of your portfolio.

3. Eased ‘Testing the Waters’ Rules

One limitation that businesses faced in using Regulation Crowdfunding is that they had to take a big leap of faith when running a campaign because they were expressly banned from “testing the waters” before their campaign went live. This meant that businesses were not supposed to contact potential investors prior to their Reg CF campaign going live and shared with the public.

Under the regulatory refresh, the “testing the waters” limitations have been relaxed dramatically and now, with proper disclosure, a business that is considering running a Reg CF campaign can ask potential investors whether they would be supportive of their campaign. This can give businesses the peace of mind to know they have support for their campaign and simultaneously give you, as a potential investor, a heads up that a business you follow may offer investment opportunities in the near future.

4. Larger Deals

Probably the largest change to Regulation Crowdfunding, and the one that has certainly garnered the most press attention is the increased size of potential campaigns. Historically, Reg CF campaigns were capped at $1,070,000 (initially $1,000,000 and subsequently adjusted up to account for inflation). But that $1,070,000 is scheduled to expand to $5,000,000. That means that every 12 months, a business can raise nearly five times as much money as had been previously allowed through Reg CF.

While on the surface, it doesn’t immediately seem like this will have much of an impact on you as an investor. But, it is important to understand that this refresh of the rules fundamentally changes the type of business that can effectively use Regulation Crowdfunding for their fundraising needs. Ultimately, it means that larger, more well-established businesses are likely to start using Reg CF, creating an ever-growing pool of potential investments for you.

Overall, these changes promise to open Regulation Crowdfunding investments up to more and more serious investors who are looking for new asset classes to diversify their portfolios.

To learn more about investing in Reg CF offerings on Honeycomb, visit our investor page here.

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