Regulation Crowdfunding

Regulation Crowdfunding was finalized by the SEC in October 2015 and became effective in May 2016. It represented a significant departure from prior federal securities law, which had historically restricted public solicitation of investors to registered public offerings (IPOs) or to private placements available only to accredited investors — individuals with annual income above $200,000 or net worth above $1 million excluding primary residence. Reg CF opened the ability to raise capital publicly from ordinary Americans, regardless of income or net worth, for the first time since the Securities Act of 1933.

Under the original Reg CF rules, companies could raise up to $1.07 million in any twelve-month period. The SEC increased this limit to $5 million effective March 2021, significantly expanding the practical utility of the exemption for seed and early-stage companies. The rules require companies to file a Form C with the SEC, which includes two years of financial statements (audited for larger raises, reviewed for smaller ones), a description of the business and its management team, a discussion of how the proceeds will be used, and the specific terms of the offering.

Investment limits for non-accredited investors are calculated based on income and net worth using a formula that caps the annual investment across all Reg CF offerings. For investors whose annual income or net worth is less than $124,000, the limit is the greater of $2,500 or 5% of the lesser of annual income or net worth. For investors above $124,000 in both income and net worth, the limit is 10% of the lesser of the two figures, up to a maximum of $124,000. Accredited investors are not subject to investment limits under Reg CF.

The platforms through which Reg CF offerings are marketed — called funding portals — must themselves register with the SEC and become members of FINRA. They are subject to specific investor protection obligations including providing investor education materials, conducting background checks on company officers and major shareholders, and implementing measures to reduce fraud risk.

As an equity market education matter, Reg CF has created a new pathway for non-accredited investors to access early-stage private company investment — an asset class previously reserved for wealthy individuals and institutional investors. However, the liquidity and risk profile of Reg CF investments differs fundamentally from that of publicly traded securities, and investors should approach early-stage equity with an understanding that total loss of the invested amount is a realistic outcome.