What is Crowdfunding?
At its core, crowdfunding is a method of raising capital by soliciting small investments from a large number of people, typically via online platforms. These platforms facilitate the raising of funds through debt, equity, and other hybrid financial instruments.
Crowdfunding Regulations
Understanding the different regulations is crucial for compliant fundraising. Here’s a breakdown:
Regulation Crowdfunding (Reg CF)
Cap: Up to $5 million within a 12-month period.
Eligibility: Businesses must be U.S.-based and incorporated.
Investors: Open to both accredited and non-accredited investors. Non-accredited investors are subject to investment limits based on their annual income or net worth.
Financial Disclosures:
$124,000 or less: Certified by the principal executive officer to be true and complete, or reviewed/audited financial statements if available.
More than $124,000 but not more than $618,000: Reviewed by an independent public accountant.
More than $618,000: Audited by an independent public accountant. For first-time issuers, offerings between $618,000 and $1,235,000 can provide reviewed statements.
Reporting: Annual progress and financial updates must be filed with the SEC.
Resale Restrictions: Securities cannot be resold for one year.
Regulation D
506(b): Unlimited funds from accredited investors, up to 35 non-accredited investors. No general solicitation allowed. No ongoing reporting requirements after the offering.
506(c): Unlimited funds from accredited investors only. General solicitation allowed but issuers must verify investor accreditation.
Financial Disclosures: None required for the SEC.
Resale Restrictions: Securities cannot be resold for one year.
Regulation A+
Cap: Up to $75 million in a 12-month period.
Eligibility: U.S. and Canadian issuers.
Investors: Open to any investors worldwide.
Financial Disclosures:
Tier 1 (up to $20 million): Unaudited financials, with state registration required.
Tier 2 (up to $75 million): Audited financial statements, semi-annual and annual reports.
Advertising: Public solicitation allowed.
Resale Restrictions: None for securities listed on a national exchange.
Key Features of Reg CF
Improved Terms: Increased offering limits and removal of investment limits for accredited investors.
Testing the Waters: Allows issuers to gauge investor interest before filing Form C.
SPV (Special Purpose Vehicle): Enables investors to pool their investments without affecting the issuer's cap table.
Investor Requirements
Accredited Investors: No investment limits.
Non-Accredited Investors:
Income < 124,000: Invest the greater of 2,500 or 5% of the greater of their annual income or net worth.
Income >= $124,000: Invest up to 10% of their annual income or net worth.
Financial Instruments
Debt: Promissory notes, often secured by collateral.
Equity/Revenue Share: Common or preferred stock, with preferred equity offering limited liability and priority in profit distributions.
Hybrid Instruments: Examples include SAFE (Simple Agreement for Future Equity) where investors get a mix of equity and debt benefits.
Important Milestones in Crowdfunding
Start of Offering: Listing on the platform.
Early Close or Extension: Depending on the funding progress, issuers may close the round early or extend it.
Rolling Close: Continue fundraising after meeting the minimum target.
Cancellation Deadline: Investors can cancel investments up to 48 hours before the closing date.
For detailed information and further reading, visit the SEC's official page on crowdfunding.
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