SEC Small Business Forum Recommends Raising Reg CF Funding Cap To $20 Million, Other Key Changes To Improve Access To Capital

The Securities and Exchange Commission held its annual Small Business Forum back in March of this year. This past week, the SEC published recommendations from participants in the gathering.

These recommendations are available here.

Several of the suggestions impact online capital formation, including Reg CF. One key recommendation is to raise the funding cap of Reg CF from $5 million to $20 million. This has been advocated by multiple insiders in the securities crowdfunding sector as filling a gap in the capital formation process for smaller firms.

When Reg CF was approved, it first held a mere $1 million funding cap, which should have been obvious to all was too small except for the smallest of issuers. During the tenure of Chairman Jay Clayton at the SEC, the funding cap was raised to $5 million, a material improvement for the securities exemption. Yet, at the same time, for larger, more mature private firms to benefit from the exemption, some believe the cap should be higher.

Today, the median seed stage funding round is $3 to $3.5 million, with the average around $5 million. For a Series A funding round, the median sits at around $19.6 million, with the average higher at $39.6 million. This is for very early-stage private firms.

CI connected with Sherwood Neiss, co-founder of Crowdfund Capital Advisors (CCA) and CCLEAR, which tracks daily online capital raising, and a securities crowdfunding OG who helped create the bill that became law in 2012. We asked Neiss his thoughts on the recommendation to boost the Reg CF funding cap to $20 million and how it sits within the capital ladder for firms in need of growth capital.

“The SEC’s own Forum has now told Congress what the data has been saying for years: the $5 million cap is the binding constraint on community capital. Reg CF was built to be the first rung on the capital ladder, and it works — but the next rung is broken,” explained Neiss. “A company that maxes out at $5 million faces a gap: Regulation A costs six figures and six to twelve months of qualification, and Regulation D means leaving your community behind. A $20 million cap with inflation indexing turns Reg CF into a ladder companies can actually climb — from first check to growth capital — without abandoning the investors who got them there.”

Under Reg A, a different exemption for online capital formation, an issuer may raise up to $75 million, but pursuing a Reg A securities sale includes an offering document that must be qualified by the SEC, which can take some time and a significant sum of money for an early-stage venture.

Ness notes that the SEC has done it before, during the Clayton Commission, and they can do it again without engaging elected officials.

“The Commission doesn’t need Congress. It used its existing authority (Section 3(b)(1)) in 2020 to raise the cap from $1.07 million to $5 million — nearly a five-fold increase — and the sky didn’t fall. Disclosure worked, fraud stayed negligible, and the market matured. The same authority (Section 3(b)(2)) supports $20 million. Better still, the Commission has already told us the vehicle: its response to the Forum recommendation points to the exempt offering pathways rulemaking on its agenda for October. The ask is simply that the cap increase, indexing, and the crowdfunding vehicle fixes ride in that proposal so the public can comment on actual rule text this year,” stated Neiss.

He believes that boosting the funding cap for Reg CF is a win for both issuers and the overall economy and innovation sector.

“CCLEAR data show Reg CF companies have supported an estimated $42.5 billion in economic activity since 2016 [the year Reg CF went into effect], coast to coast — and that’s with one hand tied behind the market’s back. Raise the cap and three things happen. Successful issuers stay in the most transparent corner of the private markets instead of graduating away from it. Platforms get the economics to support larger, better-vetted offerings. And communities — not just coastal VCs — get to fund the growth rounds of companies they discovered first. All of it without touching investor protections: the individual investment limits, the disclosure regime, and the intermediary gatekeeping all stay exactly where they are.”

While the last iteration of the SEC mostly focused on investor protection and political goals – straying from its mandated objectives- the SEC under the leadership of Chairman Paul Atkins has done a far better job of supporting capital formation, a vital part of the SEC’s mission. If an increase to the funding cap of Reg CF is going to happen, the Commission today holds the focus and motivation to make this a reality.