Just recently, over 95% of the population gained a new way to invest in the small and mid-sized businesses that make up over half the economy. A combination of new legislation, incredible technology, and abundant information gave rise to a new tool called “Regulation Crowdfunding”.
What is Regulation Crowdfunding?
In one sentence: it’s the most significant deregulation in securities law in over 80 years – since before the Securities Act of 1933.
Regulation Crowdfunding (or Reg CF), also known as Title III of the JOBS Act, became legal on May 16, 2016. It gives any person over 18 years old the opportunity to buy securities in private companies through a regulated intermediary (read on for a bit more on what this means).
An accredited investor is currently defined as an individual who has made at least $200,000 annually the past two years (and expects to do the same in the future) or has over $1 million in net worth, excluding their primary residence. This status excludes all but the top few percent of the US population.
The types of securities that can be issued through Reg CF vary from equity, such as common or preferred stock, to debt instruments like term loans or revenue share loans. Companies can raise up to $1,070,000 per year through Reg CF.
For Investors…
Reg CF opens up a brand-new avenue of investment opportunities. For investments as small as $100, you can become a stakeholder in a private business raising money via a Reg CF offering. Just as exciting, this can connect you with your community in a new way by generating a “crowd” of supporters that each have a vested interest in a business’s success.
For Businesses…
You can utilize this funding innovation to access new capital and connect with patrons, neighbors, and supporters in a new way. This is an opportunity to empower brand ambassadors and get your community involved in your vision.
How Does it Work?
Companies have to go through an intermediary – such as a funding portal or broker-dealer regulated by FINRA – to conduct their offering. One of Vicinity’s primary goals is to be this funding portal to connect local businesses with their community investors. We want to give both investors and companies a world-class way to connect, learn, and invest to strengthen our neighborhoods (from Latin vicinitas).
Does Anyone Actually Use Reg CF?
Since its inception in 2016, over $361 million has been raised from 497,000 investors to fund 2,429 campaigns (Source: Crowdfund Capital Advisors). In 2019, invested dollars increased over 50% from the prior year and the number of investors has grown over 150% each of the last two years. Reg CF is gaining momentum and looks to have a bright future. We believe it is an investment avenue worth learning about, but always remember the risks:
Crowdfunding Investments are speculative and involve a high degree of risk. Investors should only consider investing if they can afford to lose their entire investment. Companies seeking investments through equity crowdfunding tend to be in in earlier stages of development and their business model, products, and services may not yet be fully developed or tested. There is no guarantee that stated valuations are accurate or in agreement with the market or industry valuations. Crowdfunding Investments are generally highly illiquid and investors should only invest if they can afford to hold an investment for a period of up to 5 years or more.
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