The 2020 SEC Harmonization Rules and what it means for Venture Capital
Let’s talk about real disruption for a minute. Republic spun out of AngelList to democratize private investing. In the early days (and still) that ruffled feathers. There were naysayers among VCs, and they had the same questions:
Who would want to invest in an early stage company that has to turn to the public for funds? (Literally anyone around the world, Silicon Valley is not the epicenter.)
Are the companies using crowdinvesting worthwhile investments? (Absolutely, and you’ll see why when you see the inspirational founders and their impressive companies on our deals page.)
If I can invest through my firm or my angel network, why would I want to use an online platform to make my investment? (Because if you’re not accredited or are looking to invest as little as $100, Republic gives you access to highly curated deals to do just that.)
At the end of the day, Title III of the JOBS Act (passed in 2012, implemented in 2016) opened a lot of doors for entrepreneurs. Now gaining access to capital and the resultant ability to scale was wrested from the grip of the 3% and offered to the 97% of America previously locked out from this risky asset class. Thanks to Title III, startups could finally take small-dollar investments from both accredited and non-accredited investors. It meant that any company’s early adopters and supporters could not only be faithful customers, but also be part-owners who had a vested interest in the company’s success.
So when the SEC announced updates to these regulations on November 2nd that effectively opened even more doors for investors and founders alike, Republic was ready. In fact, Republic was instrumental in advocating for these changes and presenting critical market perspectives to the commission. We were mentioned in the final decision more than 20 times. We knew this would change the game once again and significantly improve our odds of reaching our north star.
We are all stronger when we work together, and lucky for us, our network of partners are in venture for the right reasons: to fund incredible ideas led by diverse founders who will take us into the next era of innovation. We extended an invite to current and new partners last week to update our partners on what it all means and join us on our rocket ship.
What exactly are these updates?
The SEC Harmonization rules are intended to simplify offering exemptions to promote capital formation while protecting investors. Here’s an overview of the major changes, and why we you should be as pumped about them as we are. They will go into effect in January 2021. If you would rather see the full presentation, you can access the recording of the webinar here.
Regulation Crowdfunding or “Reg CF”
- The annual cap for Reg CF fundraising on a 12-month rolling basis increased from $1.07M to $5M. Companies looking to reward their early stakeholders can now offer them an even larger stake. Legally called “issuers”, startups that previously needed access to a larger funding round can do so through Reg CF. Furthermore, this has implications for economies of scale: the onboarding costs for launching a campaign are the same, but the potential upside is now almost five times greater.
Regulation A (or “Reg A”)
- The annual cap for Reg A fundraising on a 12-month rolling basis increased from $50M to $75M. A Reg A offering is like a mini-IPO, so it can allow issuers to hold a large public fundraise before going fully public, which has implications for their valuation upon IPO.
Testing the waters
- Startups are now permitted to test the waters prior to beginning a Reg CF campaign. Currently, it is illegal for issuers to announce their intent to launch a Reg CF campaign before it actually happens. Starting in January, they can drum up interest from their community in advance, build their list of potential investors, and invite them to invest on Republic as soon as the campaign is open. This is a key benefit for underrepresented founders. Underrepresented founders often lack the friends and family circles with deep pockets who can invest in their company with little effort. The added time to build community and soft investment commitments before the campaign starts will lessen the burden of securing both the interest and the funds before time runs out. They can even market their campaign with ads and countdowns to launch.
- Accredited investors are generally not limited in how much they can invest in private companies in any other setting, so why should they be in Reg CF campaigns? We have had enthusiastic investors who want to double down on issuers they believe in, and now they can. Thanks to these updates, accredited investors will have no limit as to how much they can invest in a single campaign (currently it’s $107k) and the non-accredited maximum investment will be based on the greater of the investor’s net worth and income (net revenue and assets). So if you are retired and have considerable assets but minimal income, you can invest your assets and access these exciting deals.
I’m a founder — how do these updates benefit my company?
The implications for founders are enormous. Founders can set the terms of their own offerings and choose their security instrument. With these updates, startups can increase their customer metrics and have more leverage for a better follow-on round to a larger raise. Republic drives the majority of investment through our 800k member (and growing) investor base, our partner network, and performance marketing. The following are examples of some of the types of fundraising instruments our portfolio companies have used:
Fleeting, a trucking logistics platform, offered a Crowd SAFE (Simple Agreement for Future Equity) which is modeled off of Y Combinator’s SAFE. This is our most commonly offered security and allows issuers to collapse all of their investors into one line on their cap table. These investors do not get information rights or voting rights, and their investment does not have to convert into equity until a liquidation event.
Mitte, a home water-mineralizer company, wanted to use a Republic campaign as a growth marketing opportunity. They set a small capital goal and raised $30,000 through a Crowd SDA (Simple Debt Agreement). As soon as their campaign ended, they exited and paid $45,000 to their investors, who received a 50% ROI in just six months.
GRIT BXNG, a group fitness boxing gym, offered a Stock Purchase Agreement (equity), with shares priced at $252.45 and a $15M valuation. They raised $654,290 from 1,041 investors in just thirty days.
I’m a VC — how do these updates benefit me?
Many VCs have triaged during COVID and are looking to support their portfolio companies. For companies that would thrive given the proper resources and capital, Republic is an excellent resource. We can be used as a marketing tool or a bridge a round to make the most of their capital sources.
Again, this benefit is huge for underrepresented founders who may not have an inner circle with enough capital to get them started. If you are a VC firm that believes in the strength of diverse leadership like we do, let’s talk. Republic issuers hail from 30 cities and includes 35% women founders and 15% Black and Latinx founders. We are deeply committed to these communities and hope you will join us in supporting them.
OK I’m sold. How can I partner with Republic?
Republic is always looking for founders to support with raising capital. If you know any founders that would benefit from a Republic campaign, send them our way.
The basic criteria that Republic looks at for a company to be eligible to run a campaign are:
- U.S. incorporation/formation
- Post-product and post-revenue.*
That’s step one. If any of your companies fit that bill, contact me to refer them to Republic to find out if it’s a match.
VCs can also co-invest with Republic Labs, fund rounds directly through our deals page, and get introductions to our incredible founders if there is interest in deeper partnership. We have an excellent track record of collaborating with VCs to the benefit of investors and founders alike.
Finally, this wouldn’t be a discussion of partnerships without mention of the Republic Venture Partner Program. Our Venture Partners are leaders in private investing who champion our mission to increase access to capital. They are veterans, athletes, parents, angels, artists, and polyglots. Most importantly, they are our teammates, warriors, and fellow believers in a more equitable future. Venture Partners get access to our network and a flat referral fee for any recommended company that launches on our platform.
If you would like to be considered for the Venture Partner Program, apply here. If you’d like to talk about a partnership with Republic, schedule some time to connect with the Republic partnerships team here.
Republic and the Association of Online Investment Platforms are constantly advocating for updates to SEC regulations that will continue to open doors for startups to access capital. If you are interested in supporting our advocacy efforts, follow us on social media to stay current on our calls for support. We could not achieve all of this without our community, and we thank you for joining us on our mission to democratize access to investing and fundraising.
*Absent the last, we have faith in companies with serial founders, strong VC backing, or an impressively robust community (subscribers, users, supporters, etc.). The scope of information we assess to determine whether a company is a good fit for Republic is complex and involves rigorous due diligence by our Investment Team. If you have more specific questions about these details, let’s have a virtual coffee and I’ll tell you more.