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Crowdfunding Crash Course & Regulations

Updated: May 29

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.

Regulation Crowdfunding vs Reg D and Reg A

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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