Regulation Crowdfunding Rules
Updated: Sep 21, 2022
Raise up to $5mm from non-accredited investors!
Regulation Crowdfunding became legal in 2016 and lets companies raise up to $5M annually by selling securities such as equity or convertible note to the public online. [StartEngine]
Originally, only "accredited investors" - around 10% of the American households - were eligible to invest in startups.
Since the implementation of Regulation CF in 2016, any 18 + year old can invest in these companies through equity securities, revenue shares, convertible notes, or tokens etc.
Regulation CF allows companies to raise a maximum aggregate of $5M within 12 months through crowdfunding offerings. The fundraising must go through an intermediary (FINRA-regulated funding portal or broker-dealer) that is registered with the SEC. During the raise, companies are required to maintain public disclosures and annual reports for transparency.
In order to raise funds, the company must be
(1) A registered legal entity,
(2) A U.S.-based operating entity,
(3) A corporation or an LLC, and
(4) the founder is at least 18 years old in order to raise capital on most platforms.
Note that the requirements may differ between intermediaries and they also have their own screening processes.
Executives and 20%+ shareholders must also pass a “bad actor” check as there are disqualifying provisions set by SEC.
Form C must be filed with the SEC before proceeding with the raise which contains basic information about the company and its crowdfunding offering. Other requirements depend on the amount that they need to raise.
For $0 - $107,000 – filing for Regulation CF can be done by the business owner.
For $107,000 - $1,070,000 – an independent review by a CPA must be done on the past two years’ financial statements of the company.
For $1,070,000 - $5,000,000 – the company needs to have an audit.
The financial review and legal documentation may cost around $4,000 to $10,000, excluding the audit.
Crowdfunding platforms can charge between 7% to 8% of the funds raised and can be paid through cash, equity, or both, depending on the business owner and intermediaries’ agreement.
The companies may use social media to promote their offering but are only limited to sharing the links of their offering in a chosen funding portal where the terms of the offering are presented and the actual investment will be processed.
The chosen intermediary will also manage the closing of the raise and if crowdfunding is successful, the funds can be used by the company to operate. Otherwise, the money will be refunded to the investors.
By Sasha Hodder, Crypto Attorney & Bitcoin Enthusiast