Capital-Raising Opportunity for Small Businesses: SEC Extends Amendments Loosening Regulation Crowdfunding Requirements

Let’s face it: financing options for small businesses have been minimal, especially during the COVID-19 crisis. According to a recent SEC announcement regarding Regulation Crowdfunding, limiting factors include labor and supply chain disruption, investor behavior changes, and declining revenues in many industries. Also, according to data between May 16, 2016, and July 31, 2020, issuers with no revenues initiated 49% of the offerings, and only 11% of offerings were by issuers who reported a profitable fiscal year just before the offering.

In May of 2020, due to the widespread effects of the pandemic, the Securities and Exchange Commission (SEC) adopted new amendments that loosened Regulation Crowdfunding requirements. More recently, the effective date and expiration date for these temporary rules have been extended. Regulation Crowdfunding offerings initiated between May 4, 2020, and February 28, 2021, are now eligible for the temporary relief, which will now expire on September 1, 2021.

Who’s Using Regulation Crowdfunding?

Crowdfunding trends indicate that small businesses have been the primary users of Regulation Crowdfunding since its 2016 effective date. Notably, small companies generally do not have access to other securities market options, and they also tend to lack internal cash flows. According to the recent SEC announcement, the SEC has received feedback that before the temporary rules, Regulation Crowdfunding requirements may have hindered or prevented issuers from launching and completing offerings quickly enough to meet urgent capital needs to be made greater by the current crisis. Furthermore, the relief has been “well received by the market” and has indeed enabled some issuers to raise badly needed funds. In fact, as of July 31, 2020, out of 248 Form C offerings made by eligible issuers in July, 94 relied on the temporary crowdfunding rules. That’s 38% of the eligible offerings.

How Do the Temporary Rules Help Small Businesses?

Intended for small, established businesses affected in some way by COVID-19, the temporary amendments to Regulation Crowdfunding requirements enhance flexibility. They ease specific financial statement review requirements and expedite the availability of funds to an issuer. Because of the extended timeline, issuers can research market interest before producing their offering materials. Furthermore, while issuers may proceed with an initial form C offering without certain financial disclosures, the rules do not permit crowdfunding intermediaries to accept investor commitments until all required financial information is available. Requirements for such intermediaries serve to protect investors, and it’s important to note that, according to the SEC, “relatively few enforcement actions” have been brought against crowdfunding intermediaries and issuers.

One additional reason the SEC implemented and extended these temporary rules is that they “incrementally enhance competition between small businesses and larger businesses,” as stated in the announcement. Also, by extending the rules, current small businesses will compete on equal footing with companies who utilized Regulation Crowdfunding when the COVID-19 relief amendments first became effective.

At VerifyInvestor.com, we’re passionate about serving small businesses that utilize crowdfunding in the private placement market. The main type of crowdfunding we handle is 506(c) crowdfunding, which has the specific requirement that its investors must be accredited investors. During these unprecedented times and beyond, be sure to follow our blog for important finance industry news, as well as the latest updates about accredited investor requirements.