Regulation Crowdfunding (also known as Regulation CF or Reg CF) was first signed into law in April 2012 as one part of the Jumpstart Our Business Startups Act, or JOBS Act. The JOBS Act was enacted to facilitate access to capital for startups and small businesses, give a broader spectrum of people the ability to invest in startups and small businesses and to stimulate economic growth. Regulation CF is an exemption to the registration requirements under the Securities Act of 1933 which means that a full registration of the security offering is not required. Although a registration and review of the offering by the securities regulators is not required, an issuer of securities under the Reg CF exemption must meet certain disclosure requirements and must comply with regulations regarding, among others, the marketing of the securities and investor limitations.
Some of the key components of the exemption are:
- Any type of U.S. entity can utilize Regulation CF;
- Raise amount limited to $5M in a 12-month period;
- Entities may sell securities in all 50 states;
- An online intermediary must be used to market and sell the securities;
- Specific financial information must be disclosed and, depending on your raise amount, your financial statements may need to be reviewed or audited by an accountant;
- Both accredited and non-accredited persons can invest, although investors are limited to investing a certain dollar amount based on their income or net worth; and
- Regulations now permit issuers to “test the waters” or solicit indications of interest prior to choosing which exempt strategy, such as Reg CF, Rule 506 or Reg A, to use.
Some things we like about Regulation CF:
- Virtual anyone can invest in your enterprise;
- You can offer any kind of investment (stock, notes, membership interests revenue share notes);
- Marketing and advertising is permitted (with some limitation on content); and
- Investors across all 50 states can participate.
Like most capital raises:
Regulation CF requires issuers to file a disclosure document that includes 2 years of GAAP financial, who your officers, directors and significant stakeholders are, past financings, intended use of funds, and all material risks.
Some limitations of Regulation CF:
- The $5 million raise limit may not be sufficient for some businesses (we can help with strategies to work in conjunction with a Reg CF raise to increase the overall raise amount).
- Non-accredited investors are limited to investing the greater of 10% of their income or net worth each year.
- Any advertisements done outside the portal are limited to the following information:
(1) a statement that the issuer is conducting an offering and a link to their funding portal;
(2) the terms of the offering; and
(3) identifying facts like name, legal identity, location, phone, website, e-mail, and a brief description of the business.
(4) the “terms of the offering” including: (a) the amount of securities offered; (b) the nature of the securities; (c) the price of the securities; and (d) the closing date of the offering period.
- Regulation CF requires ongoing reporting for at least 1 year including CEO certified financial statements.