New rules for VC(?)
Hey Stonks fans! A bit of a different tone today, coming at you from the Stonks Legal Department with some proposed legislative updates that could really spice up the venture capital space.
There are several bills pending in the House of Representatives that aim to make VC more accessible in a variety of ways, from raising the amounts a startup can crowdfund to making it easier for VC funds to invest in secondaries. With a divided Congress and a Democratic president, it’s a toss-up which of these (if any) end up making it into law and in what form: for now, we’ll break down the benefits of a few of the proposals for your reading pleasure.
Improving Crowdfunding Opportunities Act
This law would further expand on the JOBS Act of 2012, particularly in the “VC for the masses” department under Reg CF. If passed, it would allow companies to raise up to $10M in Reg CF fundraising/year (up from the current $5M), potentially making it a lot more attractive to startups. Currently, a Reg CF campaign can take a lot more time and money than the standard Reg D raises (which can raise an unlimited amount of money from an unlimited* number of accredited investors with minimal paperwork), so many startups are turned off of the prospect of getting hundreds or thousands of small checks when they could just get a few big ones for less work. Raising the cap to $10M could allow for more companies to take advantage of opportunities like the Community Round to grow their war chest AND their user base at the same time 👊
Additionally, this law would allow for “investment companies” (read: micro-VC funds) to use Reg CF to raise funds, which could enable Average Joes and Janes to invest in funds (rather than individual companies), granting them some much-needed diversification in the startup ecosystem and letting GPs with lots of followers raise from the masses. TBD on how this one would work out, since Reg CF currently requires things like audited financials and other documentation of an existing company, but opening this asset class on a broader scale is a net positive for everyone.
Developing and Empowering our Aspiring Leaders Act
The DEAL Act would, among other things, allow secondary purchases of private shares and funds investing in other VC funds to count as "qualifying venture capital investments," which could massively extend the exemption that many VCs rely on to avoid having to register as an investment adviser. Usually, once you hit $150M in AUM, you have to register with the SEC, unless you only advise “qualifying venture capital funds” making “qualifying venture capital investments.” Historically, this has been defined to mean that you need to directly purchase equity from a company: no secondaries, no investing in other VC funds, no public companies, no crypto, etc. For multi-asset funds, there was a 20% “non-qualifying investment” basket that could do these other types of transactions, but going over that 20% limit lost the exemption. Counting secondaries and fund-of-fund investments as qualifying investments would allow VC funds to get into later-stage companies and other funds without worrying about blowing the exemption; with secondaries so hot right now, this law could amp that up even more.
Photo taken at Tech Week
Improving Capital Allocation for Newcomers Act of 2023
The ICAN Act—possibly named after Carl Icahn? 😛—would expand investor limits in funds that rely on the 3(c)(1) exemption from registration as an investment company. Under current law, once you have more than 99 investors in a fund (including SPVs), you would have to register that fund as an investment company with the SEC, and you would also have to register as an investment adviser to manage that fund. They increased this limit for “qualifying VC funds” to 249 investors back in 2018 for funds of up to $10M (which is how our Stonks Seed Round SPV was able to have > 200 investors). Historically, this means that some investors may get cut as GPs prioritize larger checks to fill out their fund: sorry Grandma, that $12 birthday check just didn’t make the grade for this round!
The new rules would increase the general 3(c)(1) investor limit to 199, and the VC fund investor limit up to 600 investors(!) and $150M in committed capital(!), allowing for VC funds to take checks from a LOT more people, again expanding the potential universe of startup investors. For more context on how this helps investors AND fund GPs (and thus the startups they invest in), check out Mac Conwell’s testimony to Congress in support of the bill.
Regulation A+ Improvement Act of 2023
The lesser-known kid brother of the IPO, Reg A+ allows startups to publicly raise up to $50M/year from accredited and non-accredited investors alike. Often called the “mini-IPO,” Reg A+ also allows for the shares sold to be traded immediately upon issue.
This act would bump that cap up to $150M in a 12-month period, tripling the amount a company can raise. Looking forward to seeing the next crop of startups on Going Public with that kind of cash potential!
Helping Angels Lead Our Startups Act of 2023
The aptly-named HALOS Act (👼 😇) defines an angel investor group for securities law purposes. It also codifies some rules around general solicitation and demo days: specifically, demo days meeting the requirements of the act would not be considered general solicitation, so startups would not have to verify accreditation for all investors in the round if they discussed their fundraising deets live at a qualifying demo day.
Many accelerators and incubators are still wary about this, though: fortunately, Stonks handles all the accreditation verification for FREE for startups pitching on the platform, and with our DDVs you can split the difference: invite your network privately without verification, pitch publicly and let us handle the review work to verify. It’s a win-win! 🤝
Like I said at the top: it remains to be seen how this all shakes out. After the rough year for VC in 2022, though, we'll be staying glued to C-SPAN and hoping these laws can get the ecosystem back in the black 🤞