The past couple of years have presented challenges for small businesses and startups seeking to raise capital. In the third quarter of 2023, seed and early-stage funding continued to decline, we saw the lowest deal count in three years, and the ripple effects from the tech downturn are still playing out. Although there are glimmers of positive change (AI companies have raised quite well lately), this is a moment to consider your full suite of funding opportunities if you need to raise money for your business. For some of our clients, Regulation Crowdfunding (Reg CF) provides a way to bring in much-needed capital when institutional investors aren’t an option or aren’t economical.

Securities Laws Framework

Let’s level set – Congress passed the big ticket securities laws (the Securities Act of 1933 and the Securities and Exchange Act of 1934) with the goal of protecting investors after so many lost their shirts in the stock market crash of 1929. These laws and the regulations that followed were aimed at supporting investors to make smart, informed investment decisions in part by requiring companies to provide those investors with information about their business and formalizing consequences for misinformation. The system we ended up with is that all securities must be registered with the Securities and Exchange Commission (SEC) unless those securities qualify for an exemption. Registration is no joke – I’ve worked on quite a few IPOs and subsequent public company offerings and the process of preparing the disclosure alone takes a lot of time, labor, and money. The exemptions from registration are an important way that companies can raise money without taking on that heavy registration burden, and Regulation Crowdfunding is one such exemption.

How Reg CF Works

Regulation Crowdfunding (see here for some Reg CF resources from the SEC) allows companies to raise up to $5 million over a 12-month period from both accredited and non-accredited investors, provided that certain requirements are met.

Reg CF is a newer exemption, following from the Jumpstart Our Business Startups Act of 2012 which was passed with the intention of making it easier for small businesses to find funding. Reg CF, which was finalized in 2015, was groundbreaking at the time because it’s hard to raise money from non-accredited investors – the SEC has the view that they, more so than accredited investors, need more of the protections which the Depression-era laws created so they are excluded from some of the other exemptions. Reg CF, however, allows companies to raise money from non-accredited investors. For companies without connections to accredited investors or with founders who historically are ignored by them but who do have non-accredited investors in their communities who want to invest, Reg CF can be an incredibly powerful tool. Although Reg CF does allow you to raise money from non-accredited investors, it isn’t unchecked – there are caps on how much any one non-accredited investor can invest in Reg CF offerings across issuers (but your funding portal, see below, typically monitors this for you).

If you’re preparing for a Reg CF offering, you should talk to a lawyer about your specific situation and to fully understand the requirements, but here is a high-level snapshot of the required steps to raise under Reg CF:

• Partner with a registered broker or funding portal (for example, WeFunder) to conduct the offering – check out this funding portal comparison tool to dig in deeper;
• Prepare an Offering Memorandum with certain disclosure about your business, your directors and officers, your beneficial owners, how you plan to use the money you raise, information on your financial condition, and plans for the future;
• File a Form C and certain other updates with the SEC; and
• Comply with post-offering annual reporting obligations (failure to keep up with your annual reports can make you ineligible to use Reg CF to raise money down the road).

One benefit to Reg CF offerings is that there is no SEC review process baked in, which means you don’t have to wait to start your raise after you’ve filed your Form C. There isn’t a limit to how many total investors can participate in a Reg CF offering, but fortunately these soon-to-be holders are exempt from the tallying up that could result in required Section 12(g) registration, so long as the company is current in its ongoing annual Reg CF reports, has total assets at the end of the most recent fiscal year of $25 million or less, and has engaged the services of a transfer agent registered with the SEC. Otherwise, if you ended up with more than 500 non-accredited investors in your Reg CF raise, the company would be subject to the onerous 12(g) registration process – this alone is good motivation to stay current on your annual reports!

In addition, keep in mind that there are integration rules that may apply if you’re doing multiple types of financings close in time to each other and you’ll need to be mindful of how you discuss the offering with potential investors before it launches. Prior to a Reg CF offering, you can test out investor appetite in a limited capacity by engaging in testing the waters activity. This allows you to solicit interest in the potential offering from the general public, provided your solicitation materials meet the requirements, including using certain legends, and you include them when you file your Form C. We can help you understand how the full suite of requirements apply in your circumstances. Although you will need to work with a registered broker or funding portal, you should involve legal counsel early and often to make sure your offering is conducted in compliance with the securities laws and regulations.

If navigating the securities laws seems daunting, consider what historical Reg CF offerings have looked like. A 2019 report by the SEC found that the median Reg CF issuer had total assets of approximately $30,000, no revenue, and employed about three people. The median amount raised by completed offerings was just over $200,000.00. Reg CF is designed for, and successfully being used by small, new businesses.

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information available on this site is for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information as laws and regulations may have evolved since it was posted. No reader of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel. This website contains links to other third-party websites. Such links are only for the convenience of the reader and JWPC does not recommend or endorse the contents of the third-party sites.