Raising Funds Becomes Easier with New SEC Rules

The U.S. Securities and Exchange Commission has modified rules which affect how businesses can raise capital via direct equity and listings crowdfunding.

Direct Listings

Formerly, in a direct record , a business could sell current stocks (from workers and private investors) on public stock exchanges. Unlike initial public offerings (IPOs), which market newly-issued stocks, no new shares could be issued.

Nonetheless, in December 2020 the SEC declared it would expand direct listings to permit companies to issue new shares on the New York Stock Exchange only.

The new rule is an appealing alternative to a conventional IPO because it eliminates much of the cost. In an immediate listing, a company doesn’t need to hire investment banks to underwrite the sale of stocks as in an IPO. The investment banks charge a commission per share, which generally ranges from 3 to 7 percent. They handle the IPO, market the shares to institutions, and encourage the inventory via their trading desks — all mainly with institutional investors like pension funds.

This rule is an appealing alternative to a conventional IPO because it eliminates much of the cost.

With the NYSE plan, businesses can sell stocks directly on the market in an auction, allowing more individual investors to buy shares at the initial offering price, instead of buying in the aftermarket as they do with IPOs. Nasdaq, another stock market, is also negotiating with the SEC to allow direct record increases.

Let us see our merchandise:

“This is a game-changer for our capital markets, leveling the playing field for casual investors and supplying companies with a different path to go public in a moment when they’re seeking just this sort of invention,” NYSE President Stacey Cunningham commented in a statement.

In addition to bypassing prices, companies that follow the direct listing process may prevent the usual IPO limitations, like lockups that prevent insiders from selling their shares for a specified period, often up to six months.

The SEC decision wasn’t unanimous. The counter-argument to direct listing investments is that individual investors aren’t sophisticated and may make investment choices which result in financial harm. Moreover, an underwriter markets and promotes the new stocks, improving the chances that they’ll sell. In an immediate listing, the issuer accounts.

Nonetheless, the new direct listing rules are expected to attract tech businesses. Coinbase, the cryptocurrency market which enables users to purchase and trade decentralized tokens like Bitcoin and Ethereum, last month filed for an immediate record with the SEC.

Likewise Roblox Corporation, a video game company with an in-game buy version, changed its mind about moving forward with an IPO and is opting for an immediate listing.

NYSE restrictions still exist concerning the size of organizations that may use direct listings. These rules include, among other requirements: (I) a minimum amount of current shareholders, (ii) a $4 minimum price per share, and (iii) at least $100 million market value of common equity on the first day of this listing.

These principles would exclude many early-stage start-ups. For them, a new equity crowdfunding expansion may provide a means to raise funds.

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Equity Crowdfunding

In November 2020 the SEC amended crowdfunding rules, which the SEC calls”Legislation Crowdfunding. ” The new rules, which go into effect on March 15, allow businesses to raise $5 million each 12 months by selling securities through controlled, online crowdfunding portals. The original limitation, which received much criticism because of its small size, was $1.07 million. (The significant disclosure and reporting requirements remain in place.)

The new rules… allow companies to raise up to $5 million each 12 months…

Besides increasing the amount companies can increase, the alterations boost investment limitations. For an accredited investor (a individual who has an annual income exceeding $200,000 for the previous two decades, or $300,000 for joint income), there isn’t any longer a limitation on the amount invested in a business using a Regulation Crowdfunding offering. A man is also regarded as an accredited investor if she has a net worth exceeding $1 million, either independently or jointly with a partner.

For non-accredited investors, the investment limit will be the higher of (as opposed to”lesser of” under the present rule) existing limits based on an investor’s yearly income or net worth.