Regulation Crowdfunding (Reg CF) allows companies to sell securities via crowdfunding to the public. It’s a process that encourages fundraising, and it’s especially beneficial for startups that require capital to set themselves up for future growth.
There are specific things to know about Regulation Crowdfunding so that you stay compliant and know how to navigate the process. Read the rest of this article to cover all your bases.
What is the Regulation Crowdfunding Exemption?
Regulation Crowdfunding is an exemption from the lengthy registration requirements for securities-based crowdfunding. It basically enables companies to sell up to $5 million of their securities within a 12-month period without having to go through the lengthy and costly process of registering it with the Securities and Exchange Commission (SEC).
Who Can Invest in Regulation Crowdfunding?
Unlike some other offerings in which investors have to meet certain or specific criteria in order to invest in the offering, anyone in the general public is allowed to invest capital for startups and early-stage companies.
However, there is a limit to how much people can invest during a 12-month period if they are non-accredited investors:
- If their annual income or net worth is lower than $124,000, the limit is the greater of $2,500 or five percent of the greater of the investor’s annual income or net worth.
- If the annual income and net worth are both equal to or higher than $124,000, the limit is 10 percent of the greater of their annual income or net worth.
If you are an accredited investor, you are allowed to invest an unlimited amount of capital.
How Can You Invest in a Regulation Crowdfunding?
Although anyone can invest in Regulation Crowdfunding, this has to be done in a specific way. You have to make use of an online platform belonging to a broker-dealer or a funding portal that’s registered with the SEC and is a member of the Financial Industry Regulatory Authority (FINRA).
To make an investment in a Regulation Crowdfunding, you need to create an account on the platform. The entire process, including your communications, will be electronic.
If you try to make an investment outside of these portals, this is strictly prohibited.
Can You Sell Your Shares?
The thing about Regulation Crowdfunding is that you’re not permitted to sell your shares whenever you wish to during the first year. There are exceptions to this rule, however. If the shares are transferred in the following ways, then they can be sold:
- They are transferred to the company that issued the securities.
- They are transferred to an accredited investor.
- They are transferred to a family member.
- They are transferred in connection with a circumstance such as death.
- They are transferred to a trust that’s managed by you or a trust that was created for the benefit of a family member.
- They are transferred as part of an offering registered with the SEC.
What are the Disclosure Rules of Regulation Crowdfunding?
Unlike with publicly-listed companies, the information investors receive is a bit more limited. Regulation Crowdfunding companies only need to disclose their results of operations and financial statements every year, via annual reports. They will have to fill out Form C-AR with the SEC, and submit it within 120 days after the end of their fiscal year.
What Do You Need to File for a Regulation Crowdfunding?
When establishing your Regulation Crowdfunding investment, it’s not just Form C-AR that you need to submit. You will have to complete Form C with the SEC.
This form is a lengthy form that has many questions. Some of what you’ll have to fill out includes:
- How many securities are offered
- Their price (or how price will be determined)
- Information about directors and officer of the company
- Risks involved for investors
- Information about the purpose of the offering
- Description of the issuer’s securities
- Information about the issuer’s financial situation
You will have to submit Form C before you launch your Regulation Crowdfunding offering and accept investments.
What are Other Regulation Crowdfunding Requirements?
Besides filing Form C, companies engaged in Regulation Crowdfunding might have to get their financial statements reviewed by an independent public accountant. This is required for large offerings. For smaller offerings, the financial statements can be certified by management.
Companies will also have to create an offering statement, which is Form C. Once it’s filed with the SEC, it will be made available publicly on the portal.
As mentioned earlier, companies will have to use the broker-dealer or funding portal registered with the SEC to complete their offerings.
Do You Need a Lawyer for Regulation Crowdfunding?
While you might not need to hire a lawyer for Regulation Crowdfunding, it is recommended as they can help you through every step of the process. Some ways in which they can help you include the following:
- They’ll ensure you remain compliant with the SEC, such as by filing Form C.
- They’ll guide you on how to collect the right information for all your offering documents.
- They’ll ensure you provide financial disclosure to reduce your liability risks.
- They’ll structure your Regulation Crowdfunding offering so that it’s legally sound.
- They’ll guide you on selecting the right platform for your offering, such as by choosing a registered and valid one.
Where can you find a lawyer to help you with Regulation Crowdfunding?
While it can be stressful to find a lawyer for Regulation Crowdfunding, ContractsCounsel makes it an easy process that doesn't take a lot of time or energy. This online legal network connects clients with lawyers who have been vetted on the platform.
The platform gives you all the information about lawyers that you need, such as their credentials, fields of expertise, previous projects they’ve completed on the platform, and client ratings. This prevents you from having to do your own research, so you can choose the best lawyer for your requirements and get on with raising capital for your business.
