Over the last couple of years, entrepreneurs with big start-up ideas have been tuning in to the wonders of equity crowdfunding to help them raise capital online for their businesses.
Reg CF, under Title III of the JOBS Act, has especially been a game-changer. For the first time, start-ups are able to get funding from both accredited and nonaccredited investors without too many costly reporting requirements.
But how does equity crowdfunding work? And more specifically, how does Reg CF work?
Basically, equity crowdfunding is a way to raise money to fund a startup or scale a business online through investors. The end goal is to sell shares of your company to investors in exchange for capital.
Not only will this help fund you, but since your company’s success means better returns for your investors, they’ll be rooting for you and advocating for your brand throughout your journey.
The three types of equity crowdfunding are Reg A+, Reg D, and Reg CF.
Each of them has its benefits, but for smaller start-ups, Reg CF (regulation crowdfunding) is usually the best bet. You can’t raise as much money as you can with Reg A+ and Reg D, but you can raise from both accredited and nonaccredited investors without too many costly reporting requirements.
But that doesn’t mean there aren’t rules about what you can and can’t do with Reg CF. Not just any kid with a lemonade stand can issue an offering. You do have to comply with the SEC’s Reg CF requirements and limits.
CrowdCrux knows that navigating equity crowdfunding requirements and sifting through all the legal jargon can be intimidating, so we’ve put together our ultimate Reg CF checklist for startups that are thinking of launching a Reg CF campaign.
(Of course, keep in mind that we at CrowdCrux aren’t attorneys or accountants. The information in this article isn’t legal advice; it’s based on our own opinions and research. You should double-check with legal counsel to be safe).
Here’s a general overview of the Reg CF requirements you must meet to launch your campaign (you can read more about them on the SEC’s website)
- Your maximum offering cannot be more than $5 million
- Your campaign must take place through a crowdfunding portal or platform
- Your company must be in the US
- Your company must not already be an Exchange Act-reporting company
- You must have a specific business plan
- You must file your offering statement on Form C and disclose relevant financial information
- You must provide progress updates
- You must file annual reports
- Your marketing materials must comply with SEC limits
- You’re cannot be a “bad actor”
These are most of the basic Reg CF requirements. Now let’s take a closer look at what each one entails so you can make sure you stay compliant.
(Though if you really want to get into the nitty-gritty of how to do a regulation crowdfunding campaign, you should definitely look into our FREE Equity Crowdfunding Course.
It covers everything from picking your platform, to attracting investors, to mastering your equity crowdfunding marketing campaign. Don’t miss out!)
1. Your Maximum Offering Cannot Be More Than $5 Million
There are reg CF limits to how much money you are able to raise through your campaign. At the time of writing this article, you are allowed to raise a total of $5 million within a 12-month period. This is the maximum security offering you can issue to investors.
If you’re looking to raise more, Reg CF might not be the best fit for you, but keep in mind that you can raise a lot more with Reg A+ (up to $75 million), though the compliance and reporting requirements are much more costly and complicated than they are with Reg CF.
2. You Campaign Must Take Place Through a Crowdfunding Portal Or Platform
Legally, you can’t run a Reg CF campaign on your own. You need to do it through a portal or platform that is designed for hosting equity crowdfunding campaigns.
Plenty of reputable and well-established sites exist for you to choose from, such as WeFunder, StartEngine, SeedInvest, and Republic.com. You should investigate as many as you can to determine which one best meets your needs.
It’s also worth noting that in addition to the requirements on our checklist, individual platforms may have their own requirements for businesses that apply.
3. Your Company Must Be Based in the US.
This one is pretty self-explanatory. Under the JOBS Act, only US-based companies can raise capital through Reg CF.
There are some equity crowdfunding opportunities for startups outside of the US – for instance, businesses based in Europe may raise money through platforms like CrowdCube – but Reg CF is limited to the US.
4. Your Company Must Not Already Be An Exchange Act-Reporting Company
If you are already required to file reports with the SEC, your company is not eligible for Reg CF.
Companies with more than $10 million in assets and equity securities held by at least 2,000 individuals or 500 accredited investors must file SEC reports.
Small startups are not usually Exchange Act-reporting companies.
5. You Must Have a Specific Business Plan
You can’t run a Reg CF campaign on a whim. The SEC specifies that you have to have a well-thought-out business plan (beyond vague mergers and acquisitions).
6. You Must File Your Offering Statement on Form C and Disclose Relevant Financial Information
Companies running Reg CF campaigns must file their offering statements on their Form C through the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system and with the platform you are using.
Form C will ask you to disclose some relevant information about your company, such as a description of your services, information about your owners and officers, the price of the securities you’re offering, your target raise amount (and what you’ll do if you’re offered more), your target raise deadline, and info about party-related transactions.
You’ll also need to disclose relevant financial statements, and this is where things get a bit complicated because the nature of the statements you need to provide depends on how much you’re aiming to raise.
You can read about this in more detail on the SEC’s website linked above, but essentially, businesses offering $107,000 or less in securities need to disclose financial statements and Federal Income Tax return info that has been certified by the principal executive officer.
Businesses offering more than $107,000 in securities must disclose financial statements reviewed (or audited, if available) by an independent public accountant.
Businesses offering more than $535,000 in securities that have sold securities in the past must disclose financial statements audited (not reviewed) by an independent public accountant.
7. You Must Provide Progress Updates
According to the SEC’s website, businesses raising funds through Reg CF need to provide progress updates twice during their campaign.
The first one needs to be completed within 5 business after you reach 50% of your goal, and the second one needs to be completed within 5 business days after you reach 100%. You’ll need to complete a third one if you end up accepting more than your original goal.
Your progress updates will be filed on the SEC’s Form C-U, and if the equity crowdfunding platform you’re using provides updates for you, you’ll only need to file one Form C-U that reports on the total amount of securities sold during your campaign.
8. You Must File Annual Reports
If you’re selling securities through Reg CF, you need to file an annual report through Form C-AR on the SEC’s EDGAR within 120 days of the end of your company’s fiscal year.
You’ll also need to post the completed Form C-AR on your website.
Form C-AR will ask for information similar to what you provided on your offer statement.
9. Your Marketing Materials Must Comply With SEC Limits
The SEC does impose some REG CF limits on your equity crowdfunding marketing campaign, and that means there’s some information you can’t put into your marketing materials.
If you’re posting promotional content on social media, for instance, you can’t give too much specific information about your business model and the services you offer.
You can, however, let everyone know that you’re running a campaign through an equity crowdfunding platform, announce the terms of the offering, and provide some basic information about your business and how to find your campaign.
10. You Must Not Be a “Bad Actor”
This doesn’t mean you have to be a Shakespearian master. It’s a rule in place to prevent people who might have bad intentions from taking advantage of Reg CF.
If you have prior convictions or sanctions for security fraud or a related crime, you can be disqualified from launching a Reg CF campaign.
So What’s Next…?
After you’ve made sure you can check off all the boxes on our Reg CF requirements checklist and verified with an accountant/lawyer that everything looks good, it’s time for the fun part: setting up your campaign and watching your business grow with each investment!
What does it take to run a successful Reg CF campaign?
If you want some expert advice, get yourself a copy of Equity Crowdfunding Explained, by CrowdCrux’s very own Salvador Briggman.
It will tell you everything you need to know about mastering your platform, finding investors, and meeting all your goals so you can grow your startup, and you can get a free copy with a free trial of Audible.
Once you’ve learned the ropes of equity crowdfunding, you’ll be amazed at how streamlined the business world has become!
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