Crowdfunding Regulation
Crowdfunding regulation under Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012, implemented by the SEC as Regulation Crowdfunding in 2016, permits small businesses to raise up to $5 million per year from unaccredited investors through registered online funding portals, subject to disclosure requirements, investment limits, and ongoing reporting obligations designed to protect retail investors.
Before the JOBS Act, securities laws effectively prevented most startup companies from soliciting small investments from the general public without conducting a full-scale registered public offering — a process far too expensive for early-stage companies. Title III of the JOBS Act and the SEC's implementing Regulation Crowdfunding (Regulation CF) created a new exempt offering pathway specifically designed for small capital raises from large numbers of small investors through online platforms.
Under Regulation CF, an issuer may raise up to $5 million in any 12-month period (the limit was increased from $1.07 million to $5 million in March 2021) from a combination of accredited and non-accredited investors, provided the offering is conducted exclusively through a single SEC-registered intermediary that is either a broker-dealer or a registered funding portal.
Issuers conducting Regulation CF offerings must file Form C with the SEC, disclosing the company's principal business, management team, financial condition, use of proceeds, ownership and capital structure, and the offering terms. Issuers that have raised less than $124,000 in prior Regulation CF offerings may use financial statements certified by the principal executive officer; those that have raised between $124,000 and $618,000 must provide reviewed financial statements; those raising more than $618,000 must provide audited financials if this is not their first Regulation CF offering.
To protect retail investors from concentrating excessive wealth in illiquid, high-risk startup securities, Regulation CF imposes annual investment limits on individual investors that scale with their income and net worth. Investors with annual income or net worth below $107,000 may invest the greater of $2,200 or five percent of the lesser of their income or net worth. Investors with both income and net worth above $107,000 may invest up to ten percent of the lesser of the two, subject to a cap that adjusts periodically.
Securities purchased in a Regulation CF offering generally may not be resold for one year except to the issuer, accredited investors, family members, or in registered offerings. This transfer restriction reflects the long-term, illiquid nature of startup investments and is intended to prevent rapid resale by informed early investors at the expense of later purchasers.
Issuers with more than $10 million in assets and more than 2,000 holders of record (or 500 non-accredited holders) become reporting companies subject to full Exchange Act reporting obligations, but most Regulation CF issuers remain small enough to use annual Form C-AR reports as their ongoing disclosure vehicle.