Crowdfunding has become a key tool for startups and small businesses seeking to raise capital from a broad investor base. Regulation Crowdfunding, introduced under the JOBS Act, allows companies to raise funds from both accredited and non-accredited investors through SEC-registered online platforms. This guide outlines key requirements, disclosure obligations, and practical considerations for issuers navigating Regulation Crowdfunding.
Understanding Regulation Crowdfunding
Key Requirements
To qualify for Regulation Crowdfunding, issuers must meet specific requirements:
- Maximum Offering Amount: Companies can raise up to $5 million within a 12-month period.
- Investor Limits: Non-accredited investors have annual investment limits based on income and net worth. The maximum investment cap for non-accredited investors is $124,000 per year.
- Intermediary Requirement: Offerings must be conducted through a registered funding portal or broker-dealer.
- Issuer Eligibility: Some companies are ineligible, including foreign companies, reporting entities under the Exchange Act, and certain investment firms.
Issuer Disclosure Obligations
Form C Filing and Required Information
Before launching an offering, issuers must file Form C with the SEC via the EDGAR system, providing key details such as:
- Company information, business description, and fundraising purpose.
- Financial statements, with varying levels of review based on the offering size.
- Details on key stakeholders, including officers, directors, and 20%+ equity holders.
Financial Statement Requirements
| Offering Size | Financial Statement Requirement |
|---|---|
| Up to $124,000 | Certified by the issuer’s CEO, or reviewed/audited if available. |
| $124,000 – $618,000 | Reviewed by an independent public accountant (audited if available). |
| Over $618,000 | Audited financial statements required, unless it is the issuer’s first crowdfunding offering. |
Ongoing Reporting
Issuers must file an annual report (Form C-AR) until they:
- Become a reporting company,
- Have fewer than 300 record holders and filed at least one annual report, or
- Have filed three annual reports and have assets below $10 million.
Advertising and Promotion Rules
Issuers may only advertise their crowdfunding offering by directing potential investors to the registered intermediary’s platform. The advertisement can include:
- Basic details about the offering (e.g., security type, price, deadline).
- Business description and contact information.
- A link to the intermediary’s platform.
Use of Paid Promoters If an issuer compensates individuals or entities to promote their offering, the promotion must include a clear disclosure of the compensation arrangement.
Investment and Transfer Restrictions
Investor Limits
| Investor Income or Net Worth | Investment Limit |
| Below $124,000 | Greater of $2,500 or 5% of income/net worth |
| $124,000 or more | 10% of income/net worth (up to $124,000 max) |
Resale Restrictions
Securities purchased via Regulation Crowdfunding cannot be resold for one year, except under specific conditions, such as sales to the issuer, accredited investors, or in registered offerings.
Additional Considerations
Testing the Waters
Before filing Form C, issuers may gauge investor interest through “Testing the Waters” communications, provided that they clearly state:
- No funds will be accepted until the offering is officially filed.
- Indications of interest are non-binding.
Integration with Other Offerings
Issuers can conduct multiple fundraising rounds but must be mindful of integration rules, ensuring that separate offerings comply with applicable securities laws.
Bad Actor Disqualifications
Certain individuals and entities with prior securities violations (e.g., fraud, SEC sanctions) may be disqualified from conducting a Regulation Crowdfunding offering. Issuers must conduct due diligence to ensure compliance.
Regulation Crowdfunding presents an opportunity for companies to tap into a diverse investor base while navigating a structured regulatory framework. Understanding the rules, compliance obligations, and investor limitations will help issuers run a successful crowdfunding campaign while maintaining regulatory compliance.
For further guidance, consult the SEC’s official resources or engage legal and financial professionals experienced in crowdfunding regulations.
https://www.sec.gov/resources-small-businesses/regulation-crowdfunding-guidance-issuers
