Securities exemptions are key to investing in private markets. But what are they?

How U.S. law supports investing in private businesses with digital asset securities

by Alex Broudy, Technical & Financial Writer
May 4, 2022

The last article in this series reviewed the four most common categories of securities: debt, equity, derivative, and hybrid securities. This article will go over the securities regulations and exemptions that make raising capital and issuing stock possible without going public, as well as how digital asset securities can complement that process. Since the way investors are able to participate in private markets is determined by these regulations, understanding where they come from and why they can help investors stay ahead of the curve.

Three securities exemptions were signed into law with the passing of the JOBS Act in 2012: Regulation Crowdfunding (Reg CF), Regulation A, and Regulation D, Rule 506. These exemptions expanded access to private capital markets by exempting businesses from registration when offering or selling securities under certain conditions. By removing the need to register offerings, these exemptions help businesses raise money more easily, stay private longer, and help more investors access the private capital markets.

Reg CF enables non-accredited (retail) investors to invest in private businesses up to a certain limit based on the greater of either their net worth or annual income, and helps businesses raise up to $5 million every 12 months.

Regulation A, Tier 2, commonly referred to as the Mini-IPO or Reg A+, enables retail investors to invest alongside accredited and institutional investors so that the business using Reg A+ may raise up to $75 million every 12 months without needing to go public.

Regulation D, Rule 506 lets accredited investors invest in private businesses without an upper limit and without needing to go public.

These securities exemptions make it possible to serve both business and investor needs. While each security exemption has its own unique benefits and limitations, businesses and investors should keep in mind liquidity, regulatory, and market risks when issuing or investing in securities. For businesses, these securities exemptions represent an opportunity to easily raise capital without needing to go on expensive fundraising tours. For retail investors, the opportunity to invest in private businesses without needing accreditation status helps democratize investing by leveling the playing field.

Both of these benefits can be seen in the case of Exodus (EXOD), which raised $75 million from 6,800 investors in 60 days using Reg A+ Mini-IPO. In this case, 92% of initial investors were non-accredited, demonstrating the power of the Reg A+ security exemption in action.

Exodus was the first business to use Reg A+ and reach the capital limit of $75 million, quickly turning its customers into investors using digital asset securities. According to a recent Exodus case study, turning customers into shareholders has many benefits: it can drive customer growth and new revenue, as shareholders are more likely to talk positively about a brand that they are invested in and new shareholders' average weekly spend increases by 30-40% (during 3-6 months).

Today, investors who own these digital security tokens can trade them across multiple secondary markets, including Securitize Markets. And trading on secondary markets is a key step on the pathway to potential liquidity for new securities as it helps establish a fair market value for new assets. Over time, as buy and sell orders are matched, price discovery occurs. With digital asset securities, determining price is more transparent and direct than trading traditional securities, which often take days to settle across multiple intermediaries. This regulatory clarity and technological transparency provide a unique advantage to both businesses and investors.

"From July 1, 2020 through June 30, 2021, nearly twice as much money was raised in exempt offerings as through public offerings.”

— SEC Commissioner Caroline A. Crenshaw, Remarks at Symposium on Private Firms, April 14, 2022

Clearly, the demand for more private market access has been heard. Through the regulations and securities exemptions that the JOBS Act ushered in, and the transparency that digital asset securities provide, investors are now able to more easily participate in private capital markets. As digital asset securities firms like Securitize bring more of these private market solutions to life, more education will be needed as well. To learn more about digital asset securities, subscribe for updates below.

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