Regulation Crowdfunding (Reg CF)

Regulation Crowdfunding (Reg CF) is the SEC framework permitting crowdfunding offerings to non-accredited investors through registered funding portals or broker-dealers. Authorized by Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 and effective in 2016, Reg CF was significantly expanded in 2021 with the offering limit raised from $1.07 million to $5 million annually. Reg CF offerings are conducted online through SEC-registered funding portals and broker-dealers.

Annual offering limit, $5 million

The Reg CF annual offering limit is $5 million in any 12-month period (raised from $1.07 million in March 2021). The increase substantially expanded Reg CF's utility for growing companies, pre-2021, Reg CF was practical only for very early-stage offerings; post-2021 expansion, Reg CF supports more substantial Series A-equivalent offerings.

Per-investor limits

Reg CF imposes per-investor limits based on income/net worth: (1) either annual income or net worth less than $124,000, the greater of $2,500 or 5% of the greater of annual income or net worth; (2) both annual income and net worth at least $124,000, 10% of the greater of annual income or net worth, up to $124,000; (3) accredited investors, no per-investor limit (post-2021 expansion). The thresholds are adjusted periodically for inflation. Per-investor limits are aggregated across all Reg CF offerings in 12-month period.

Funding portal requirement

Reg CF offerings must be conducted through SEC-registered funding portals or broker-dealers. Funding portals are subject to SEC and FINRA regulation including: registration, AML, customer protection, communications restrictions, due diligence requirements. Issuers contract with platforms for offering execution; platforms charge fees, sometimes including equity in the issuer. An issuer may use only one intermediary for an offering.

Form C disclosure

Reg CF issuers must file Form C with the SEC and provide it to investors via the funding portal. Form C disclosures include: (1) company description, business, products, market; (2) management, directors, officers, 20%+ owners; (3) financial information, based on offering size: (a) $124K or less, financial statements and certain tax return information certified by the principal executive officer; (b) more than $124K up to $618K, financial statements reviewed by an independent accountant; (c) more than $618K, audited financial statements, except that a first-time Reg CF issuer may provide reviewed statements for offerings up to $1.235M; (4) use of proceeds; (5) offering terms, security type, pricing, investor rights; (6) risk factors; (7) related-party transactions; (8) indebtedness. The financial statement requirements escalate with offering size.

Ongoing reporting

Reg CF issuers must file ongoing reports with the SEC: (1) Form C-AR (annual report), due within 120 days after fiscal year-end and required until the first of: (a) the issuer becomes an Exchange Act reporting company; (b) the issuer has filed at least one annual report since its most recent Reg CF sale and has fewer than 300 holders of record; (c) the issuer has filed, since its most recent Reg CF sale, annual reports for at least the three most recent years and has total assets of no more than $10M; (d) the issuer or another party repurchases all Reg CF securities; (e) the issuer liquidates or dissolves. The annual report must include financial statements certified by the principal executive officer, or reviewed or audited statements if the issuer has them, and updated business information.

Resale restrictions

Reg CF securities are subject to one-year resale restriction. During that year, transfers are permitted only to the issuer, to an accredited investor, in an SEC-registered offering, or to family members and in similar circumstances. After the year ends, the Reg CF restriction lapses. These securities are not "restricted securities" under Rule 144, though affiliate status and state law can still limit resales. Many funding portals offer secondary trading platforms supporting Reg CF securities; secondary liquidity is improving but remains limited compared to public-market alternatives.

Testing the waters (2021 expansion)

The 2021 expansion permits "testing the waters" before formal Reg CF offering, issuers can solicit investor interest without committing to specific offering terms. This allows: (1) gauging investor interest before incurring offering costs; (2) building investor list; (3) refining offering terms based on feedback. Communications must include specific disclosures and cannot solicit or accept money or commitments before the Form C is filed. The provision resembles Rule 255 under Regulation A.

Bad actor disqualification

Reg CF includes Rule 503 bad actor disqualification parallel to Rule 506(d): covered persons (issuer, directors, officers, 20%+ owners, certain promoters) cannot have specified disqualifying events. A disqualifying event makes the exemption unavailable unless an exception applies, such as the reasonable-care exception, which depends on the issuer not knowing and not being able to know of the disqualification. Intermediaries must deny platform access to an issuer they have a reasonable basis to believe is disqualified and must run a background and regulatory history check on the issuer and its officers, directors and 20% owners.