Companies need to raise capital from time to time, and there are several ways they can do so. One of the most popular options today is called Regulation Crowdfunding, which is usually shortened to Reg CF. How does Regulation Crowdfunding work, and what are some of the main advantages? Take a look at a few important points below, and make sure you reach out to an expert who can help you put your equity crowdfunding efforts in the best position possible to be successful.
What Is SEC Regulation CF?
Under SEC Regulation CF, private companies are allowed to raise up to $5 million dollars of capital from the general public. For most of the past 100 years, private companies were only able to raise capital from accredited investors. This meant that only the wealthiest individuals and families in the United States were able to invest in companies.
In April 2012, The JOBS Act (Jumpstart Our Business Startups Act) was signed, and it gave entrepreneurs the ability to advertise their capital raises to the general public. Initially, companies were only able to raise $1 million dollars under Reg CF, but in 2021, the limit was increased to $5 million dollars, making it easier for businesses to raise money and opening the door to new investors who were previously unable to contribute to small businesses.
There are several reasons why companies may want to raise money using Reg CF. Some of the biggest benefits include:
Startup companies are now able to raise money from anyone instead of only accredited investors, expanding the potential investor pool while eliminating the requirement to use venture capital and private equity firms.
Because startup companies will have an easier time raising money, they have more control over their businesses as they grow.
Businesses can also increase brand loyalty because investors who own stock in a specific business are more likely to recommend that company to others.
The reporting requirements under Reg CF are far more lenient when compared to other capital fundraising options.
For all of these reasons, businesses of all sizes should consider raising money under Reg CF, but there are several important requirements that they need to follow.
What Are the Requirements of Regulation CF?
Even though the reporting requirements under Reg CF are more lenient when compared to other fundraising options, there are still several requirements that businesses need to follow. They include:
Quick Summary of Reg CF Requirements
Maximum Amount That Can Be Raised
Blue Sky Preemption
Yes, and some states require Blue Sky filing notices and fees.
Solicitation and Advertising
Permitted, but only after Form C has been filed
Investors are limited in terms of what they can invest, but it varies depending on their income and net worth. If the investor’s annual income and net worth are equal to or greater than $124,000, then during any 12-month period, investors can invest up to 10 percent of annual income or net worth, whichever is greater, but the amount cannot exceed $124,000.
Non-US and investment companies excluded. Companies must be organized in the U.S. with some exceptions.
Manner of Sale Requirements
Offers and sales are only allowed to take place using FINRA-registered crowdfunding portals
SEC Filing Required
Yes, companies are required to file regular paperwork with the SEC, using Form C and its regular reporting duties including annual reports.
Yes, resale restrictions are in place, and stock cannot be traded in the public markets until shares have been registered or meet Rule 144 requirements.
Steps in the Reg CF Process
There are several steps to follow when preparing a Reg CF offering. Some of the most important steps include:
Prepare the Offering: The first step is to prepare the Reg CF offering. All Reg CF raises need to take place using an SEC/FINRA registered broker-dealer. Companies are also required to draft and file Form C with the SEC before they move forward.
Advertise the Raise: After companies have finished filing Form C, they will be allowed to advertise the capital raise to potential investors. It is critical to have strong marketing and PR campaigns to attract as many investors as possible.
Launch the Raise: The next step is to actually launch the raise on a crowdfunding platform. Other companies can boost the raise including equity crowdfunding marketing agencies.
Accept Investments: Investors will need some time to evaluate all of their options, so the company cannot close on any of their Investments until 21 days after the Reg CF offering has been listed.
Close the Round: The broker-dealer will monitor the closing process to ensure that all regulatory and legal obligations are met. Once the offering has been completed, the funds that have been held in escrow will be transferred to the company.
This is just a general overview of how the fundraising process works under Reg CF. The exact details of the steps may vary from company to company, but that is why it is important to work with a professional team that has experience in this area. You can customize your campaign to meet your needs.
Examples of Notable Companies To Have Provided a Regulation CF Offering
There are several examples of notable companies that have raised significant amounts of money through Reg CF. They include:
Zenefits: Zenefits is a technology company that provides cloud-based software as a service (SaaS) to companies to help them manage their human resources departments. Zenefits programs generally focus on payroll compliance and health insurance management. Zenefits conducted its Reg CF fundraising on Wefunder, and since that initial round of fundraising, has raised a total of $581,500,000.
Freight Farms: Freight farms is an agriculture company that manufactures and sells container farms. Their farms use hydroponic farming (meaning without soil) retrofitted to grow in freight containers, providing fresh food to people globally. Freight Farms conducted its Reg CF fundraising on Wefunder, and since that initial round of fundraising, has raised a total of $11,405,407.
Ginkgo Bioworks: Ginkgo Bioworks is a biotech company that specializes in using genetic engineering to produce bacteria that can be applied to the industrial sector. These bacteria can be used to eat, destroy, and convert different types of waste, helping companies solve waste management issues while also protecting the environment. Ginkgo Bioworks conducted its Reg CF fundraising on Wefunder, and since that initial round of fundraising, has raised a total of $719,000,000.
These are just a few examples of successful companies that have raised large amounts of money using crowdfunding. Now, under Reg CF, it is easier than ever for the average person to invest in startup companies.
As a result, companies that are looking for a way to diversify their investor base should consider launching a Reg CF crowdfunding effort. Partnering with an experienced professional is critical for these efforts, and that is where we can help you.
Prepare for your Reg CF Offering
Raising capital through equity crowdfunding offering online can be tricky if you don’t get the right team involved. At Colonial Stock Transfer, we can help you with the following to prepare you for your Reg CF offering:
Free Consultation and introductions to the best Funding Portals for your company