Regulation Crowdfunding (also known as Regulation CF or Reg CF or Title III) was first signed into law by President Barack Obama in April 2012 as one part of the Jumpstart Our Business Startups Act, or JOBS Act. The JOBS Act was 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 Regulation 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 entity can utilize Regulation CF;
Raise amount limited to $1M in a rolling 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; and
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.
Some things we like about Regulation CF:
Virtual anyone can invest in your enterprise;
You can offer any kind of investment (stock, notes, revenue shares);
Online marketing is permitted (only on a registered portal); and
It allows investment from residents of all 50 states.
Like most capital raises:
Regulation CF requires issuers to file a disclosure document that includes 2 years of GAAP financial, your number of employees, who your officers, directors and significant stakeholders are, past financings, intended use of funds, and all material risks.
Some potential drawbacks of Regulation CF:
$1 million limit may not be sufficient for some businesses (we can help with strategies to work in conjunction with a Reg CF raise)
Investors are limited to investing between 5% to 10% of their income or net worth each year as follows:
If either the annual income or the net worth of the investor is less than $100,000, the investor is limited to the greater of $2,000 or 5% of the lesser of his or her annual income or net worth.
If the annual income and net worth of the investor are both greater than $100,000, the investor is limited to 10% of the lesser of his or her annual income or net worth, to a maximum of $100,000.
Almost all advertising must be done on the investment portal. Advertisements outside the portal can only include: (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. The “terms of the offering” include: (1) the amount of securities offered; (2) the nature of the securities; (3) the price of the securities; and (4) the closing date of the offering period. Your ability to communicate directly with potential investors about matters outside the above-described facts is limited.
Regulation CF requires ongoing reporting for at least 1 year including CEO certified financial statements.