Part 6 of 7 in the Capital Raising Series | Veritas Global Law PLLC
For most of securities law history, investing in private companies was the exclusive domain of the wealthy and well-connected. Ordinary investors could purchase publicly traded stocks but were largely shut out from early-stage companies where significant wealth creation often occurs. Regulation Crowdfunding, implemented in 2016 under Title III of the JOBS Act, changed this calculus by creating a legal pathway for companies to raise capital from the general public through SEC-registered intermediaries.
Regulation CF—as it’s commonly called—permits companies to raise up to $5 million in a 12-month period while accepting investments from anyone, regardless of accreditation status or income level. The framework balances this unprecedented access with investor protections: mandatory use of registered intermediaries, disclosure requirements, investment limits based on income and net worth, and restrictions on resale.
This article examines Regulation Crowdfunding comprehensively—from the mechanics of conducting an offering through a funding portal to the ongoing reporting obligations that follow a successful raise. For founders seeking to engage their communities as investors, and for advisors helping clients evaluate this pathway, understanding Regulation CF’s structure is essential.
The Core Framework: How Regulation CF Works
Regulation Crowdfunding operates through a distinctive structure that differs fundamentally from traditional private placements. Understanding these mechanics is essential before evaluating whether Regulation CF fits your capital-raising strategy.
The Intermediary Requirement
All Regulation CF transactions must occur through an SEC-registered intermediary—either a broker-dealer or a funding portal. Issuers cannot conduct Regulation CF offerings directly; the intermediary serves as a gatekeeper and facilitator.
Funding portals are a category of intermediary created specifically for Regulation CF. They must register with the SEC and become members of FINRA. Unlike broker-dealers, funding portals face restrictions: they cannot offer investment advice, solicit purchases, or hold customer funds or securities (unless appropriately registered or in compliance with applicable regulations).
The intermediary requirement serves several purposes. Platforms provide standardized disclosure presentation, facilitate investor education, handle subscription mechanics, and create an organized marketplace. The intermediary must also conduct background checks on issuers and their principals, providing a layer of due diligence.
Offering Limits
Issuers may raise up to $5 million in a 12-month period under Regulation CF. This limit increased from the original $1.07 million in March 2021 as part of the SEC’s exempt offering harmonization, significantly expanding the exemption’s utility.
The $5 million ceiling applies to the aggregate amount raised under Regulation CF during any rolling 12-month period. Securities sold under other exemptions—such as Regulation D or Regulation A—do not count against this limit, though issuers should consider integration principles when conducting concurrent offerings under multiple exemptions.
Investor Limits: Protecting Non-Accredited Participants
Regulation CF permits investment by any investor, but imposes limits on how much non-accredited investors may invest across all crowdfunding offerings during a 12-month period. These limits are designed to prevent unsophisticated investors from concentrating excessive risk in illiquid, high-risk investments.
Investment Limit Calculation
For non-accredited investors, the investment limit depends on annual income and net worth:
These limits are cumulative across all Regulation CF offerings—not per-offering limits. An investor who reaches their limit through one crowdfunding investment cannot invest in additional Regulation CF offerings until the 12-month measurement period rolls forward.
Intermediaries must have a reasonable basis to believe investors comply with these limits. Platforms typically rely on investor self-certification, though they cannot proceed if they have reason to question the accuracy of provided information.
Disclosure Requirements: Form C and Beyond
Regulation CF requires issuers to file a Form C with the SEC and provide disclosure to investors and the intermediary. While less extensive than registered offering requirements, these disclosures provide investors with material information about the issuer and the offering.
Required Disclosure Elements
Form C must include:
• Basic information about the issuer, including legal name, jurisdiction, address, website, and ownership structure
• Description of the business and anticipated business plan
• Names and backgrounds of directors, officers, and 20%+ beneficial owners
• Description of the issuer’s financial condition, including discussion of liquidity, capital resources, and historical results
• Description of the securities being offered and how they may be valued
• Target offering amount, deadline, and what happens if the target is not reached
• Use of proceeds—how the company will use the money raised
• Related party transactions
• Risk factors specific to the issuer and the offering
Financial Statement Requirements
Financial statement requirements scale with offering size:
• Offerings up to $124,000: Financial statements certified by the principal executive officer, or reviewed/audited if available
• Offerings between $124,000 and $618,000: Financial statements reviewed by an independent public accountant (or audited if available)
• Offerings above $618,000: Financial statements audited by an independent public accountant (first-time issuers may provide reviewed financials)
These thresholds are adjusted periodically for inflation. The requirement for reviewed or audited financials at higher amounts adds cost but provides increased assurance to investors.
The Offering Process: From Launch to Closing
Platform Selection and Application
Before launching, issuers must select a funding portal or broker-dealer platform. Platforms vary in their focus areas (consumer products, real estate, technology, etc.), fee structures, marketing support, and investor communities. Researching platform track records and fit is an important early step.
Platforms conduct due diligence on applicants, including background checks on principals and review of business documentation. This process typically takes several weeks and may result in requests for additional information or documentation.
Form C Filing and Campaign Launch
Once the platform approves the issuer, the Form C is filed with the SEC. Unlike Regulation A, no SEC review or qualification is required—the filing is a notice that makes information publicly available. The offering can begin accepting investments once the Form C is filed and the platform launches the campaign.
Campaign Period and Investor Engagement
Most Regulation CF campaigns run for a defined period—commonly 30 to 90 days—during which the issuer markets the offering and investors commit funds. Platforms typically escrow committed funds until the offering closes.
Issuers must set a target amount and deadline. If the target is not reached by the deadline, committed funds are returned to investors and no securities are issued. Many offerings also set a maximum amount, closing the campaign early if the maximum is reached.
Communication with investors during the campaign is permitted and encouraged, but issuers must direct potential investors to the intermediary’s platform. All investor communications about terms of the offering must flow through the platform to maintain the intermediary’s gatekeeper role.
Investor Cancellation Rights
Investors may cancel their commitments up to 48 hours before the offering deadline. This right ensures investors can reconsider based on campaign developments, issuer communications, or changes in their own circumstances. Issuers should plan for the possibility that some committed capital may fall away near the deadline.
Bad Actor Disqualification in Regulation CF
Like Regulation D and Regulation A, Regulation CF incorporates bad actor disqualification provisions that prevent certain individuals and entities from participating in offerings.
Covered Persons
The disqualification provisions cover:
• The issuer and any predecessor or affiliate
• Directors, officers, general partners, and managing members of the issuer
• Beneficial owners of 20% or more of outstanding voting equity
• Promoters connected with the issuer
• Persons compensated for soliciting investors
• Directors, officers, and partners of such compensated solicitors
Disqualifying Events
Disqualifying events mirror those under Regulation D and Regulation A: criminal convictions related to securities, court injunctions, regulatory orders, SEC disciplinary actions, and similar events. The lookback periods vary by event type.
Intermediaries must conduct background checks on issuers and their principals, which helps surface potential bad actor issues. However, issuers should conduct their own inquiry before applying to a platform, as discovering disqualifying events during platform due diligence creates delays and complications.
Disclosure vs. Disqualification
Events occurring before May 16, 2016 (the Regulation CF effective date) do not disqualify an issuer but must be disclosed to investors. Post-effective-date events result in disqualification unless a waiver is obtained. The SEC may grant waivers for good cause shown, but issuers should not assume waivers will be granted.
Ongoing Reporting Obligations
Completing a Regulation CF offering triggers continuing obligations that issuers must plan for and budget accordingly.
Annual Reports on Form C-AR
Issuers must file an annual report on Form C-AR with the SEC no later than 120 days after the end of each fiscal year. This report includes updated disclosure about the business, financial statements, and information about the issuer’s securities.
The annual report must be posted on the issuer’s website and made available to investors. This creates a baseline of continuing transparency for crowdfunding investors.
Termination of Reporting Obligations
Ongoing reporting obligations terminate when the issuer:
• Becomes subject to Exchange Act reporting obligations
• Has filed at least one annual report and has total assets not exceeding $10 million
• Has filed at least three annual reports and has fewer than 300 record holders
• Repurchases all securities sold under Regulation CF
• Liquidates or dissolves in accordance with state law
Until one of these conditions is met, the issuer must continue filing annual reports—an obligation that extends indefinitely if the issuer grows beyond the asset threshold while maintaining a substantial shareholder base.
Resale Restrictions: The One-Year Holding Period
Securities sold under Regulation CF generally cannot be resold for one year after purchase. This restriction is a key difference from Regulation A, where qualified securities are freely tradeable.
Exceptions to the Holding Period
The one-year restriction does not apply to transfers:
• To the issuer
• To an accredited investor
• As part of a registered offering
• To a family member, in connection with death or divorce, or to a trust for family benefit
• To the SEC or in connection with a court-approved transaction
After the one-year period, resale remains subject to general securities law requirements. For most crowdfunding securities, this means compliance with Rule 144 or another exemption—which may be challenging given the typically limited public information about Regulation CF issuers.
Types of Securities in Crowdfunding Offerings
Regulation CF permits the offer and sale of various security types, giving issuers flexibility in structuring their offerings.
Common Equity
Many crowdfunding offerings sell common stock or membership interests, giving investors actual ownership in the company. This straightforward structure is familiar to investors and creates direct alignment between investor returns and company performance.
SAFEs (Simple Agreements for Future Equity)
SAFEs have become popular in crowdfunding, particularly for early-stage companies. A SAFE is not equity but rather a contractual right to receive equity in a future priced round, typically at a discount or subject to a valuation cap.
The SEC has cautioned investors about SAFE instruments, noting that conversion to equity is not guaranteed, valuation is uncertain, and SAFE holders may have limited rights compared to equity holders. Issuers using SAFEs should ensure clear disclosure of these characteristics.
Debt Securities and Revenue Share
Some offerings involve promissory notes, revenue participation agreements, or other debt-like instruments. These may be attractive to investors seeking more predictable returns, though they carry their own risks regarding the issuer’s ability to make required payments.
Strategic Considerations: When Crowdfunding Makes Sense
Advantages of Regulation CF
• Community Engagement: Crowdfunding converts customers, supporters, and community members into investors with a stake in the company’s success.
• Marketing Synergy: A crowdfunding campaign can generate publicity and customer awareness alongside capital—investors often become brand ambassadors.
• Access to Non-Accredited Capital: Unlike Rule 506, Regulation CF permits investment by anyone, expanding the potential investor pool significantly.
• Lower Minimums: Platforms often permit investments as low as $100, making equity ownership accessible to investors who couldn’t meet typical private placement minimums.
• No SEC Pre-Review: Unlike Regulation A, no SEC qualification is required—offerings can launch once Form C is filed.
Considerations and Limitations
• $5 Million Cap: The offering limit may be insufficient for companies seeking larger raises—Regulation A or Rule 506 may be more appropriate.
• Platform Fees: Intermediaries charge fees that typically range from 5-10% of amounts raised, plus potential equity stakes or success fees.
• Ongoing Obligations: Annual reporting requirements continue indefinitely until termination conditions are met.
• Resale Restrictions: The one-year holding period and subsequent resale limitations may concern investors seeking liquidity.
• Investor Management: A successful crowdfunding campaign may result in hundreds or thousands of investors, creating cap table complexity and communication obligations.
Regulation CF Compared to Other Exemptions
Looking Ahead
Regulation Crowdfunding has grown substantially since its 2016 launch, with the 2021 increase to $5 million significantly expanding its utility for early-stage companies. For founders with engaged communities, strong brand presence, or consumer-facing products, crowdfunding offers a distinctive path that combines capital raising with marketing and community building.
The final article in this series brings together everything covered in Parts 1-6, providing a comprehensive comparison framework and practical decision guide for choosing among the available securities exemptions based on your specific circumstances, objectives, and investor relationships.
Take the Next Step
Determining whether Regulation CF aligns with your capital-raising strategy requires evaluating platform options, disclosure requirements, ongoing obligations, and whether the exemption’s community-focused approach fits your business model and investor relationships.
Schedule a consultation with Veritas Global today. Our securities attorneys can help you assess whether crowdfunding serves your objectives, navigate platform selection and Form C preparation, and structure an offering that positions your company for success with investor-stakeholders.
This article is for informational purposes only and does not constitute legal advice. Securities regulations are complex and fact-specific; consult qualified counsel before structuring any offering.
