The legalization of special purpose vehicles (SPVs) for use in Reg CF fundraising has opened up numerous new opportunities for dealmakers. Syndicately offers a user-friendly SPV platform for its clients, simplifying investor aggregation on the cap table, addressing the challenges related to the 500 stockholder limits (also known as Section 12(g)), enabling a Lead Investor to vote on behalf of the SPV and its owners, adopting a structure familiar to VC firms and startup lawyers, all without imposing extra fees on companies or investors. We believe that SPVs are a significant advancement in this field.
What Was Wrong with the Previous Laws?
Before delving into the benefits of SPVs, it’s essential to understand the shortcomings of the previous regulations. There were three main issues that the original Reg CF failed to adequately address:
Voting & Cap Table: Managing corporate governance with hundreds or thousands of investors became a challenging task. Obtaining signatures and approvals for crucial corporate actions, such as financing or acquisitions, was practically impossible. This also complicated cap table management.
Section 12(g): Section 12(g) of the Securities Exchange Act required companies with 500 non-accredited investors to transition into public reporting. Although the SEC introduced a $25M assets threshold for Reg CF companies, it proved insufficient for successful companies.
Familiarity: Successful startups often proceed to raise funds from venture capitalists, hire startup lawyers, and engage in the broader startup ecosystem. This ecosystem values consistency and familiarity to expedite deals, making it essential to conform to established structures and norms.
Drawbacks of Existing Workarounds
SPVs are the most straightforward solution to the aforementioned issues, but they were previously illegal for Reg CF use, prompting various creative workarounds by crowdfunding platforms. Let’s examine these existing solutions and their shortcomings:
Custodians: Custodial arrangements involve one entity acting as the “record holder” of securities sold by a company, holding them on behalf of individual investors. While this creates a single entry on the cap table, it doesn’t fully resolve voting problems. There’s also uncertainty regarding whether custodians count as one stockholder under Section 12(g). Additionally, this approach lacks familiarity in the startup ecosystem and may involve additional costs.
Crowd SAFE: Modeled after the traditional YC SAFE, the Crowd SAFE delays equity conversion until a liquidity event, simplifying voting but not entirely eliminating the voting rights issue. It also doesn’t address Section 12(g), requiring separate counting of investors. Some platforms attempt to work around this by repurchasing shares or using custodians, both of which come with their own issues and lack widespread recognition.
Syndicately’s Solution: SPV + Lead Investor
Starting now, SPVs are legally usable in Reg CF fundraises, thanks to Syndicately’s innovative legal structure combining SPVs and Lead Investors, resolving all three primary issues:
Voting & Cap Table: SPVs create a genuine “one line on the cap table” solution. All voting power concentrates in the Lead Investor, simplifying approvals and document signings for all investors within the SPV. The Lead Investor acts as an advocate and resource for the company.
Section 12(g): The rule change explicitly exempts Reg CF SPVs from Section 12(g), offering clarity that SPV investors won’t count toward the 500 stockholder limit.
Familiarity: Syndicately’s approach aligns with industry standards and is easier to understand and explain than previous solutions. The simplicity and familiarity of SPVs may significantly improve crowdfunding acceptance in the broader startup ecosystem.
Fees: No extra fees for companies or investors, as Syndicately handles SPV formation and administration in-house.
Administration: Syndicately manages all filings and administrative tasks. For equity and convertible fundraises, other filings will only be necessary upon a liquidity event.
Flexibility: SPVs can work with any investment contract, whether it’s a SAFE, Convertible Note, Equity, or Debt.
Transferability: Companies retain control over secondary transfers, deciding whether to permit secondary trading by default or with their consent.
Companies choosing Syndicately for fundraising will benefit from streamlined administration and fewer obstacles in their fundraising and growth journey. This marks the next step in the evolution of crowdfunding!