What is CfPA's stance on simplifying Reg CF investment limits and advertising rules to reduce confusion and improve accessibility for issuers and investors?
Thank you for the great question! This topic aligns closely with CfPA's policy platform, and here is our perspective on the matter.
Simplification of Rules
We support streamlining overly complicated requirements such as the per investor annual investment limit, which could mirror the simpler requirement under Reg A. Similarly, the Reg CF advertising rules are extremely confusing and almost impossible to comply with – we support a simplification of these rules such as allowing issuers to include terms in all public communications (irrespective of when those communications are made in the offering process).
Background
Several aspects of Regulation CF are complicated to follow, and, although an unintended consequence, have reduced retail investor confidence in the investment process and made it more difficult for issuers to pursue funding via Regulation CF.
One Regulation CF requirement - investor limits - causes investor confusion because the requirements differ from and are more complicated than the restrictions in a Regulation A+ offering. The amount that a non-accredited investor can invest under Regulation CF during a 12 month period depends on the investor type and the investor’s annual income or net worth:
If the investor is an accredited investor as defined under Rule 501 of Regulation D under the Securities Act, as amended:
no investment limits apply.
If the investor is a non-accredited investor, they can invest the greater of:
$2,500; or
If the investor’s annual income or net worth is less than $124,000, 5% of the greater of their annual income or net worth; or
If both the investor’s income and net worth are equal to or more than $124,000, the investor can invest 10% of the greater of their annual income or net worth, but their investments cannot exceed $124,000.
These restrictions apply cumulatively, across all Regulation CF deals. This places a heavy burden on the investor to correctly track, log, and record investment amounts in every Regulation CF offering and to disclose them as part of subsequent Regulation CF investments. It also places a disclosure burden on the issuer and their intermediary to ensure these complicated investment rules are adequately conveyed to potential investors.
The requirements under Regulation A+ are much easier to understand and user-friendly: there are no limits to how much accredited investors can invest in Reg A/A+ offerings. Non-accredited investors can invest up to 10% of their net worth or annual income per offering, whichever is greater.
A second confusing aspect of the Regulation CF rules is the restrictions on issuer advertising. The advertising rules are challenging and time consuming to apply in practice. Crowdfunding issuers are prohibited from publicly communicating the “terms” of the offering except as strictly permitted by the Rule. The rule divides communications based on when the communication is made: either before or after a Form C is filed with the SEC:
Before a Form C is filed with the SEC, the issuing company can publicize its intention to conduct a Regulation CF offering under the Testing the Waters provisions of the rules.
After a Form C is filed and is publicly available, the rules create two categories of communications - terms and non-terms. In most cases issuers use non-terms communications, which means they are prohibited from mentioning six key aspects of their offering.
This restriction applies to the issuing company and all persons acting on its behalf such as promoters.
Requested Change
Investors are typically confused by the investment limits in a Regulation CF offering, particularly if they have previously invested in a Regulation A+ offering with different limitations. They also are challenged to track their total annual investments which is required since the limitations apply across ALL Reg CF investments. The SEC should streamline the investor limits in Regulation CF offerings, bringing the restrictions in line with those imposed on accredited versus non-accredited Regulation A+ investors.
Regulation CF issuers express widespread frustration regarding ongoing communication restrictions that are difficult to follow and not user-friendly. The complexity of the communication rules results in almost inevitable inadvertent violations e.g. when an issuer accidentally mentions what they are offering or how much they are raising, undermining the intention of the JOBS Act to be user friendly for small businesses who can’t afford lawyers. The prohibition on mentioning the “terms” of the offering does nothing to protect investors. The SEC should provide a standard set of advertising requirements that does not vary depending on whether a Form C has been filed or whether the “terms” are mentioned. This simplification encourages transparency and enhances investor knowledge and confidence while still protecting small investors' interests and allows issuers to more effectively inform and expand their potential community of investors.
Statutory Authority
It is uncertain whether these changes could be made without an amendment to the statute.
The SEC has already changed the per investor limits, so arguably they could change them again to reduce the complexity. On the other hand, it could be argued that the simplification we are requesting falls too far outside of what the statute requires and therefore would require a statutory amendment.
Regarding the advertising requirements, the statute prohibits advertising “the terms of the offering, except for notices which direct investors to the funding portal or broker.” The SEC could amend its rules to simplify the definition of terms and broaden what could be deemed to be a “notice” so that the rules are easier to comply with. We recommend limiting the definition of “terms” to specific pricing/financial details of the security that is being offered (but permitting the direct or indirect reference to a type of security, deadlines of the offering, minimum investment, etc.) and broadening what would be a permitted “notice” that can include terms. We also believe that the SEC could act by rule making to limit the adoption principle so that third party media coverage that does not follow these requirements (not paid for by the issuer) would not violate the advertising rules.