Regulation Crowdfunding (Reg CF)

Reg CF imposes strict annual investment caps on individual investors based on their income and net worth, a key investor protection mechanism.

• Non-accredited investors: The lesser of $2,500 or 5% of the greater of annual income or net worth (if both are under $124,000). If both are over $124,000, the limit is 10% of the greater, capped at $124,000.
• Accredited investors: No limit under Reg CF, but platforms may impose their own caps.

Companies are limited in the total amount they can raise in a 12-month period under this specific exemption.

• Maximum Raise: $5 million. This is the aggregate cap for all Reg CF offerings by the issuer within a rolling 12-month period.
• This limit is separate from, and can be combined with, other exemptions like Regulation A+ (Tier 2) or Regulation D offerings, subject to the rules of each.

Issuers must file a Form C with the SEC and provide specific disclosures to potential investors, creating a standardized information baseline.

• Initial Disclosure: Includes business plan, financial statements (reviewed or audited for raises over certain thresholds), use of proceeds, and information about officers/directors.
• Ongoing Reports: Issuers must file an annual report on Form C-AR and a termination report on Form C-TR, providing updates on financial condition and business operations.

All Reg CF offerings must be conducted exclusively through an SEC-registered online platform, which acts as a gatekeeper and compliance facilitator.

• Funding Portal: A specific, lighter-touch registration for platforms facilitating only Reg CF (cannot offer investment advice).
• Broker-Dealer: A fully registered securities firm that can also facilitate Reg CF alongside other activities.
• The intermediary is responsible for investor education, background checks on issuers, and maintaining communication channels.

While general advertising of the offering is permitted, communications are tightly regulated to prevent fraud and hype.

• "Tombstone" Ads: General ads can only include basic, factual information directing investors to the funding portal.
• Transaction-Based Compensation: It is illegal for anyone to be paid for promoting an offering without fully disclosing the compensation, a rule targeting undisclosed influencer marketing.
• All investor communication and investment must occur on the registered platform.

Rules governing investor liquidity and commitment are designed to provide a cooling-off period and acknowledge the illiquid nature of the securities.

• Cancellation Right: Investors have a legal right to cancel their investment commitment for any reason until 48 hours before the offering deadline.
• Resale Lock-Up: Securities purchased in a Reg CF offering are restricted securities and generally cannot be resold for one year, except in limited circumstances (e.g., to the issuer, accredited investors, or as part of a registered offering).

The private company raising capital. It must be a U.S.-based entity, not an investment company, and cannot be a reporting company under the Securities Exchange Act. Key requirements include:

• Disclosure Documents: File Form C with the SEC and provide it to investors, detailing business plan, financials, and risk factors.
• Annual Reporting: Submit annual reports to the SEC and investors until certain conditions are met.
• Funding Caps: Can raise a maximum of $5 million in a 12-month period.
• Use of Proceeds: Must use an SEC-registered funding portal or broker-dealer as the intermediary.

Any member of the general public can invest, but with investment limits based on their annual income and net worth, designed as investor protection measures.

• Accredited Investors: No investment limit.
• Non-Accredited Investors: Limited to the greater of:
  • $2,200, or
  • 5% of the lesser of their annual income or net worth (if both are under $124,000).
  • If both annual income and net worth are $124,000 or more, the limit is 10% of the lesser amount, capped at $124,000 total in a 12-month period across all Reg CF offerings.

Reg CF imposes strict financial boundaries on both sides of the transaction to balance capital formation with investor protection.

• Issuer Cap: Maximum raise is $5 million in a 12-month period.
• Investor Caps: As detailed in the Investor card, these are tiered based on an investor's financial profile. The rules prevent over-concentration of risk for non-accredited participants.
• Purpose: These caps are a core component of the exemption from full SEC registration, acknowledging the higher risk of early-stage investments.

Transparency is mandated to inform the public market. The issuer's primary document is Form C, which includes:

• Business Description and use of proceeds.
• Financial Statements: Reviewed by an independent accountant for raises over $124,000; audited for raises over $535,000 (with certain exceptions for first-time issuers).
• Risk Factors specific to the business and offering.
• Officer and Director backgrounds.
• Ongoing Reports: Issuers must file an annual report (Form C-AR) and a termination report (Form C-TR) when the obligation ends.

Liquidity for Reg CF securities is highly restricted, a critical risk factor for investors.

• One-Year Holding Period: Securities purchased in a Reg CF offering cannot be resold for at least one year, with limited exceptions.
• Resale Limitations: After one year, resales are generally still restricted and must often be conducted through the original funding portal or another compliant platform, not on public exchanges.
• Implication: Investors must be prepared for their capital to be locked in a long-term, illiquid investment.

Reg CF fundamentally lowers the barrier for startups and small businesses to raise funds. It allows them to publicly solicit investments online through registered funding portals or broker-dealers, bypassing traditional venture capital or bank loan routes. This provides a critical fundraising avenue for early-stage companies that may not qualify for other forms of financing.

• For Investors: Opens early-stage private market investments to the general public, not just accredited investors.
• For Issuers: Enables direct marketing and community building with a broad base of potential backers.

The regulation imposes strict financial limits to balance opportunity with investor protection.

• Issuer Limit: Companies can raise a maximum of $5 million in a 12-month period through Reg CF.
• Investor Limits: Individual investment amounts are capped based on annual income and net worth:
  • If annual income or net worth is less than $124,000: the greater of $2,500 or 5% of the lesser amount.
  • If both annual income and net worth are $124,000 or more: 10% of the lesser amount, capped at $124,000 total across all Reg CF investments per year. These investment caps are a key safeguard for retail investors.

Issuers are required to provide specific disclosures to potential investors, filed with the SEC on Form C. This includes business description, financial statements (reviewed or audited depending on the offering size), information about officers and directors, and the intended use of proceeds. Companies raising over specified thresholds must also provide ongoing annual reports on Form C-AR, maintaining a level of transparency not typically required for private companies. Failure to comply can lead to regulatory action and loss of the offering's exemption.

Securities purchased in a Reg CF offering come with significant transfer restrictions.

• Holding Period: Investors generally cannot resell the securities for one year from the date of purchase, with limited exceptions.
• Security Type: Most offerings are for equity (common or preferred stock), debt instruments, or SAFEs (Simple Agreement for Future Equity).
• No Secondary Trading: Unlike public stocks, there is no established, liquid secondary market for these securities, meaning liquidity is extremely limited for investors post-purchase.

All Reg CF offerings must be conducted through an SEC-registered intermediary: either a broker-dealer or a funding portal. These platforms perform critical gatekeeping and educational functions:

• Due Diligence: Platforms must conduct background checks on issuer principals.
• Investor Education: They must provide educational materials about the risks of investing in startups.
• Transaction Facilitation: They handle the mechanics of the offering, investor communication, and funds escrow. Examples of major platforms include StartEngine, Republic, and Wefunder.

Investing via Reg CF carries high, specific risks that differ from public markets.

• High Failure Rate: Most early-stage startups fail, leading to a total loss of capital.
• Illiquidity: The one-year holding period and lack of a secondary market mean investments are locked up.
• Dilution: Future funding rounds can significantly dilute an early investor's ownership percentage.
• Limited Information: Despite disclosures, financial and operational data is less comprehensive than for public companies.
• Fraud Risk: While intermediaries provide checks, the risk of misrepresentation or fraud remains higher than in regulated public exchanges.

A more flexible securities exemption than Reg CF, allowing companies to raise up to $75 million from the public. It is split into two tiers:

• Tier 1: Up to $20 million, with state-level review.
• Tier 2: Up to $75 million, with more stringent reporting requirements but preemption of state securities laws. Unlike Reg CF, it allows for general solicitation and has no investment limits for accredited investors.

An individual or entity that meets specific financial criteria set by the SEC, allowing them to invest in unregistered securities offerings. Key criteria include:

• Income: Over $200,000 individually ($300,000 jointly) for the last two years.
• Net Worth: Over $1 million (excluding primary residence). Reg CF is unique in that it permits investment from non-accredited investors, subject to annual limits based on their income and net worth.

The most common securities exemption, primarily used for private placements. It includes several rules:

• Rule 506(b): Allows unlimited capital raising from accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation.
• Rule 506(c): Permits general solicitation but verifies that all investors are accredited. Unlike Reg CF, Reg D offerings are generally not available to the general public and have no prescribed cap on the raise amount.

The mandatory filing document for a Reg CF offering, submitted to the SEC and made available to investors on the funding portal. It requires detailed information, including:

• Business plan and use of proceeds.
• Financial statements (reviewed or audited for raises over certain thresholds).
• Risk factors and information about officers, directors, and major shareholders. This ongoing disclosure obligation promotes transparency for retail investors.

Reg CF imposes strict annual investment caps on non-accredited investors to mitigate risk. The limits are the greater of:

• $2,200
• 5% of the lesser of annual income or net worth (if both are under $124,000).
• 10% of the lesser of annual income or net worth (if either is over $124,000), capped at $124,000. These rules are a core consumer protection mechanism of the regulation.