Dear SeedInvest Community,
This past week I, along with other industry advocates, delivered a letter to Securities and Exchange Commission (SEC) Chairman Clayton urging the SEC to raise the Regulation Crowdfunding (CF) cap from $1 million to $20 million. When we helped pass The JOBS Act more than six years ago, Congress almost unilaterally agreed with us that startups and small businesses needed better access to capital in order to create more jobs. Although we've made great strides to launch an entire industry on the back of these historic changes, we as an industry still have a lot of work left to do. Recent data suggests that, despite the passage of the JOBS Act, the fastest-growing (and job creating) startups and small businesses are still shut out from equity crowdfunding due to the current regulatory constraints.
We have shared below what we believe are a few of the most compelling arguments for expanding Regulation Crowdfunding. If you agree with our findings, we ask that you show your support by signing the petition to increase the Regulation Crowdfunding cap.
Since the passage of The JOBS Act, access to capital for early-stage startups and small business has actually become more challenging. Over the past six years, seed-stage venture capital managers have moved up-market to launch larger funds and invest in later-stage deals. This trend has resulted in a vacuum at the traditional Seed stage, as well as a corresponding, sharp decline in investment activity. After a couple boom years (2013-2015), the number of traditional Seed stage deals declined 41% and the number of dollars invested has also declined dramatically1.
Meanwhile, as early-stage venture funds decline, the number of companies looking to raise early-stage capital has actually increased, leading to a supply-demand imbalance. As a result, there is large demand from companies looking to raise $1-$20 million through non-traditional channels, but regrettably, the current regulatory framework is untenable. Unfortunately, Regulation Crowdfunding is capped at $1 million and Regulation A+ requires substantial upfront costs and disclosures as well as onerous ongoing reporting and audit requirements. As a result, Regulation A+ is not a great fit for companies which are not looking to raise a more significant amount of capital.
Reg CF < $1 Million
Reg A/Tier II $20-50 Million
Studies have shown that these high growth startups which need to raise $1-$20 million are the very same companies which create jobs in America. Recent SBA research suggests that these companies, which typically have 20+ employees and have been in operation for one to five years, play a significant role in net job creation. We frequently encounter these types of companies that have already raised an initial round of $500k to $1 million and are now looking to raise $5-$20 million in order to accelerate their growth and hire rapidly.
|Year||Jobs created by startups||Jobs created by non-startup expansions||Jobs destroyed by non-startup contractions||Jobs destroyed by non-startup deaths||Net employment effect from non-startups||Overall net employment effect|
In the United Kingdom, equity crowdfunding has been around for five years longer than the US and has a higher, $10 million maximum-resulting in a much more robust dataset than exists in the US. What we see in the UK is that equity crowdfunding has now become the preferred way for startups and small business to raise capital. In fact, the Cambridge Centre for Alternative Finance recently found that in just a few years, equity crowdfunding has grown to account for a whopping 17% of all seed and venture stage equity investment in the UK. Furthermore, equity crowdfunding has clearly helped to bolster the innovation and job boom in the UK over the past seven years, with the Centre for Economic Performance at the London School of Economics reporting that two thirds of the new jobs in the UK since 2008 have come from small and medium businesses.
In the US, although we have less data, we have also seen healthy results over the last two years. So far, 715 companies that support 4,172 jobs have raised capital through Regulation Crowdfunding. In addition, early findings suggest that women and minorities have had much greater access to capital, as well as higher success rates, through equity crowdfunding than through traditional channels.
Furthermore, despite meaningful fundraising activity through Regulation Crowdfunding, there have been zero reports of fraud thus far. Back in 2011 and 2012, during our discussions on Capitol Hill, it was suggested that the $1 million Regulation Crowdfunding cap was merely a starting point. At this point, there is sufficient data to show that equity crowdfunding has been effective at providing greater access to capital for startups and small business without materially increasing the risk of fraud. But the true potential of equity crowdfunding is still critically constrained by the arbitrarily low fundraising cap of $1 million per year. In The U.S Department of The Treasury's October 2017 report, A Financial System That Creates Economic Opportunities, Treasury recommended increasing the Regulation Crowdfunding cap and pointed out that the SEC has the requisite authority to do so. Like The Treasury, we ask that the SEC consider revisiting and raising the current cap.
If you agree with these points, I encourage you to read our letter to the SEC and to add your support to our Change.org petition. Please also help us spread the word to fellow entrepreneurs and investors. In a few weeks we plan to share the list of supporters with Chairman Clayton which will hopefully prompt additional dialogue with the SEC.
Ryan M. Feit
CEO and Co-Founder