Crowdfunding Under Reg CF

The SEC’s Regulation Crowdfunding (“Reg CF”) has opened up new avenues for startups and small companies to raise capital directly from the public without the complexity or scale of an IPO. This regulation, part of the Jumpstart Our Business Startups (JOBS) Act, passed in 2012, allows non-accredited investors to participate in early-stage funding opportunities. However, while Reg CF can be a valuable tool for raising funds, issuers must take steps to navigate its compliance requirements, and issuers are encouraged to consult with competent legal counsel in that regard.

The Essentials of Reg CF

Reg CF allows eligible companies to raise up to $5 million from individual investors over a 12-month period. In order to conduct a Reg CF offering, businesses must file their offering with the SEC, typically using Form C. Form C includes details about the issuing company, its financial condition, its use of the offering’s proceeds, and the terms of the offering, among other details.

One of the relatively unique aspects of Reg CF is that it requires offerings to be made through an SEC-registered intermediary, either a broker-dealer or a funding portal. These intermediaries are tasked with facilitating transactions, ensuring investors are educated about pertinent risks, and ensuring that issuers meet the relevant regulatory requirements.

Opportunities for Startups and Small Businesses

For startups and small businesses, Reg CF presents a unique opportunity to access capital more easily than via some traditional funding routes, such as IPOs. Crowdfunding issuances tap allow issuers to tap into a broader investor base, and are typically marketed through online / digital channels. Reg CF can be particularly successful for niche or community-focused endeavors which resonate strongly with specific groups of people, however, it is important to note that offerings via Reg CF are still the sale of securities, and not the solicitation of donations.

Compliance Challenges

It is not accurate to think of Reg CF as “easy” or devoid of ongoing compliance obligations. For issuers, Reg CF requires adherence to certain regulatory requirements both at time of issuance and thereafter, including annual updating of financial statements, amendments to Form C for significant changes, and ensuring that promotional materials are not misleading and do not omit material information. Failure to comply can lead to penalties, including potential disqualification from future offerings.

Looking Ahead

While the JOBS Act has been in effect for over a decade, the adaptation of the securities marketplace to regulatory changes and new opportunities can take some time, and the ways in which Reg CF is practically applied continues to evolve. Issuers interested in pursuing a Reg CF offering should consult with competent counsel and take steps to become familiar with the requirements and use cases of Reg CF at present.