MemberJune 20, 2020 at 1:43 pm
I’m hoping someone could help shed some light on the implications of being an accredited investor since Reg CF. What are the primary differences between investments only available to accredited investors as compared to those available to non-acreddited investors? Likewise, what are the underlying differences between the opportunities on investment platforms only available to accredited investors (e.g. AngelList and FundersClub) as compared to platforms and investments available to non-accredited investors?
I presume this is related to the structure and/or size of investment, but I’m not clear on these differences.
AdministratorJune 21, 2020 at 10:27 am
Yes – while the minimum size of the investment is one difference (accredited investors, especially on platforms such as AngelList, FundersClub, The Syndicate, and others) will typically have much higher minimum investment amounts ($5,000, $10,000, etc.), while investing under Reg CF, even as an accredited investor, is typically in the minimum range of $100-$1,000 per deal.
Here are some other differences between accredited vs. non-accredited investors in Regulation Crowdfunding:
- Minimum investment amounts – typically, investing as an accredited investor on platforms such as AngeList, FundersClub, etc. will have a higher minimum investment amount (e.g. $5,000+), whereas investing in a Reg CF deal is typically as low as $100 per deal.
- Deal Terms – while Reg CF deal terms are still evolving and may change once the SEC releases its latest proposed changes, Reg CF typically won’t come with voting rights, pro-rata, or other terms that are more common in accredited investor deals. Note: Wefunder’s new lead investor structure will be similar to an AngelList syndicate and may bring more of these rights back within the control of smaller crowdfunding investors.
- Secondary Trading restrictions – non-accredited investors cannot sell their Reg CF shares to other non-accredited investors if they acquired those shares less than a year ago in a primary crowdfunding offering. However, they can sell those shares to an accredited investor without the 12-month restriction. This is a potential benefit for accredited investors to be able to purchase shares that other Reg CF investors cannot, especially once secondary platforms (like StartEngine) are launched and become more popular.
- Due diligence – since Reg CF investors are typically investing smaller amounts and are not behind a syndicate lead (one exception: see above link for Wefunder’s new lead investor proposal), due diligence will typically have to be performed purely online, via the public Q&A forum, and through other means. You will not be able to get face-to-face time with the founder as you would if you were investing larger amounts as an accredited investor.
- Deal flow – a potential benefit of Reg CF over more traditional accredited deals (especially under Reg D Rule 506(b)), is that all deals are publicly available for anyone to invest in. This means that it isn’t as dependent on your network and who you know to get into a deal. Data is transparent and available to everyone – including competitors – which we believe is an overall positive thing for the venture industry.
- Types of companies – one of the biggest potential differences right now may be in the types of companies that you see doing a Reg CF vs. a private placement offering under Reg D. There was definitely some aversion to using crowdfunding and a previous fear that companies who raise money from the crowd would be “second rate” companies who couldn’t raise capital from traditional angels or VCs. This perception is starting to shift. As the SEC has proposed various changes that would solve issues that kept certain higher-quality companies away (such as the 12(g) cap table issue and increasing the current $1.07M cap to $5M), the hope is that more companies of high quality will see some of the additional pros of raising capital from the crowd. As such, one could argue that the disparity between the deal quality is being reduced as time goes on and the industry matures, and once the new SEC rules are adopted, will be lessened even more.
- Reg CF allows more diverse portfolios for the same amount of capital – another potential benefit of investing under Reg CF vs. investing as a traditional angel is that investors are able to build more passive and diversified portfolios of many smaller bets rather than placing a few large bets. Obviously, if you want to be involved and have more control over your investment via an advisor role or board seat, this can be a con. However, especially for angels who are just starting out, being able to place many smaller bets to gain experience can be a huge pro. And not all angels want to be actively involved with their investments.
One important thing to note: if you still plan to write a large check (e.g. $25,000 or more), you will still likely get voting, pro-rata, and other rights, even if you invest through the Reg CF portals. They typically will do what’s called a “side by side” offering of a Reg CF and a Reg D to allow accredited investors to be able to get these major shareholder rights.
Hope this helps!
FYI – some more information is in our blog post here – 5 differences between Angel Investing vs. Crowdfund Investing.
MemberJune 21, 2020 at 12:45 pm
Thanks, Brian! Yes, very helpful, and thanks for directing me towards the blog post as well. It seems that many of the historical advantages of accredited venture funding are shrinking, and that the trend suggests crowdfunding will be increasingly beneficial for both investors and startups alike.
With that in mind, what are the benefits do platforms have in requiring accreditation? It would seem beneficial for AngelList, for example, to open to Reg CF investors. As with SeedInvest, investment types that require acceditation can be separated on the platform, and as with Wefunder, investors could still back a syndicate. So why wouldn’t all platforms offer that variety and variability in investment options? Does this have something to do with deal flow?
AdministratorJune 21, 2020 at 12:59 pm
Hey Cooper – another great question.
In the case of AngelList, they actually have started to enter the Reg CF space, only it is via their spin-off, Republic.co.
I think one part of keeping the entities separate is that under today’s regulations, it’s a lot of extra effort to register as a FINRA-approved Reg CF funding portal, which is likely why Republic chose to create a separate entity from AngelList. It also attracts a different type of customer – looking for smaller dollar-amount investors vs. larger accredited investors. Lastly, it isn’t technically legal (or feasible) to set up a non-accredited investor syndicate today because of the regulations.
Wefunder has mentioned in their letter to the SEC that they are moving ahead with the lead investor structure in advance of answers to some clarifying points in the regulations that are a gray area in terms of whether it is allowed or not. I suspect more portals may follow Wefunder’s example, especially if the SEC is OK with their proposed structure.
I also think the potential market for smaller, non-accredited investors was very small four years ago, and still is today. When you consider that investors invest upwards of $1.5 trillion (with a T!) dollars under Reg D 506(b) alone in 2018, Reg CF is only a little over $300 million total since 2016 – that’s not even a fraction of a rounding error in terms of market size.
But – as you noted and as we believe – that is starting to shift and there has been a lot of growth, especially in the first half of 2020. More and more investors are finding out about Reg CF, and even accredited investors are seeing the benefits of being able to create diversified portfolios via passive holdings in promising early-stage startups.
As an accredited investor, you can get access to deals on some of the secondary sites that let employees and other investors sell private shares such as EquityZen, SharesPost, etc.
MemberJune 21, 2020 at 9:03 pm
Thanks again, Brian!
To your sixth point above, “Types of Companies” that opt for Reg CF vs. Reg D, do you know of any sudies that show valuations, IRR, or other objective measures of this disparity? I’m curious to better understand how much the two financing options either self-select winners or influence the success of a company (and portfolios that hold invest in it). Assuming the amount of total investment is finite and less than a $100k AngelList fund, it seems like the ease of diversification in the Reg CF space could lead to stronger portfolios even if many strong companies still choose venture capital when it’s an option for them.
AdministratorJune 21, 2020 at 9:39 pm
The best data I’ve come across thus far I compiled in a blog post here (check out the table about 3/4 of the way down):
AngelList has a data science team that has posted a lot of data. And Cambridge Associates publishes a lot of data on the VC industry.
Unfortunately, it’s still a little too early to have a significant number of data points for Reg CF.
MemberJune 21, 2020 at 11:15 pm
This is excellent. Thanks for pointing me to that blog post!
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