A New Catalyst for Regulation Crowdfunding in 2020

Herwig Konings
3 min readMar 5, 2020

A catalyst for incredible growth for US issuers raising capital via STOs is around the corner. And the industry is ready for it!

Photo by Christine Roy on Unsplash

I am very proud to see my company, Security Token Group, get acknowledged by the SEC for feedback that we gave them regarding improving the US private markets fundraising exemptions. I had no idea what to expect the SEC would do with all that feedback but the idea that they were reaching out to the market directly to help improve the rules put goosebumps on my arms.

In the proposed changes the regulators have now put forth in response, there was much-needed attention put into the fundraising exemptions designed around raising capital from non-accredited investors, aka the average American. Specifically, the famed Regulation Crowdfunding exemption law that was passed in 2012 by congress but not released by the SEC until 2015, and in a condition that many criticized as dead on arrival due to its limitations. Since then, the SEC recognizes that only a few hundred million or so has been raised using it, pailing in comparison to the billions and trillions raised through other exemptions that aren’t available to retail investors.

Source: SEC Proposed Rule: Facilitating Capital Formation… in Private Markets

Now the SEC has set out to fix this exemption and improve others as well! For one, they want to raise the Reg CF limit from $1,070,000 to $5,000,000 enabling a much wider audience of issuers to leverage the exemption. The Reg A+ maximum offering sizes may also be increasing by 33% to $75,000,000, creating more fundraising options for late-stage issuers too. And on the other side of the market, they are removing investment limits for accredited investors and increasing the limits for non-accredited investors. By increasing both the supply of assets and widening the pool of possible demand, a flurry of new fundraising activity will occur.

Source: SEC Proposed Rule: Facilitating Capital Formation… in Private Markets

Now marry those changes with 3 years of security token infrastructure and you’ve got a host of equity and debt securities that will be targeting the everyday investor with brand new opportunities they previously couldn’t participate in. Thanks to the benefits of fractionalized ownership, digital access, and secondary market liquidity, tokenization will become the natural choice for fundraising technology. And even with technology costs being driven down by market saturation, the increase in the limit of raising capital makes the cost of an STO that much more digestible.

I have been working with private securities exemptions since the initial passing of the JOBS Act in 2012. As someone who has been in the equity crowdfunding space and the security token space from the very beginning, take my word for it that this is what many in my position and other private capital market veterans have been waiting for. The era of tokenization can now truly kick into motion.

As with everything in government, things move slower. We now have 60 days to give additional comments to the SEC regarding their suggestions. From there, they can take their time to enact the final changes — which could actually end up being even more favorable than what’s currently proposed. And as the changes come into effect, issuer adoption will still be slow to start. However, just like with any phenomenon, it’s usually something that has been long in the works by those who create it and then next thing you know, it's mainstream.

--

--