Regulation CF Offerings Guide

Find Out What You Need to Know About Raising Capital Under the SEC’s Regulation Crowdfunding (Regulation CF)

Attorney Nick Oberheiden
Regulation CF Offerings
Team Lead

When crowdfunding began to grow in popularity several years ago, many of the companies that sought to raise capital through crowdfunding did so in violation of federal law. Selling securities implicates a host of federal laws and regulations; and, while there are exemptions from registration for qualifying securities offerings, many companies failed to take the steps necessary to qualify for these exemptions.

To address this issue, the U.S. Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding (Regulation CF) in 2015. As summarized by the SEC:

“Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012 added Securities Act Section 4(a)(6) that provides an exemption from registration for certain crowdfunding transactions. . . . [T]he Commission adopted Regulation Crowdfunding to implement the requirements of Title III. . . .

“[In] 2020, the Commission adopted certain amendments to Regulation Crowdfunding relating to the maximum offering amount, investor investment limits, special purpose vehicles, integration framework, and testing-the-waters communications . . . .”

While Regulation CF is not the only registration exemption for securities offerings, it is among the most accessible. As a result, companies in a wide range of industries use Regulation Crowdfunding offerings to raise capital during their early stages of growth. If you have questions about conducting a Regulation CF offering, here is an overview of what you need to know from the federal securities lawyers at Oberheiden P.C.:

What is Regulation CF?

Regulation CF is a federal regulation that allows qualifying companies to sell securities to the public without registering their offerings with the SEC. It is specifically intended to facilitate crowdfunding.

As we discuss in greater detail below, Regulation CF differs from other securities registration exemptions in several critical respects. With this in mind, when conducting crowdfunding campaigns, it is imperative that companies focus specifically on meeting Regulation CF’s requirements. Conducting non-exempt public securities offerings can expose companies and their owners to substantial penalties—and, in the event of SEC enforcement action, it can potentially prevent them from conducting crowdfunding campaigns in the future.

When Can Companies Use Regulation CF to Raise Capital?

Companies can use Regulation CF to raise capital through crowdfunding transactions. When these transactions involve the issuance of securities (as is often the case), the federal securities laws and regulations apply. Although securities issuances are generally subject to registration, Regulation CF provides an exemption for qualifying offerings.

While ownership shares constitute securities under federal law, securities can take many other forms as well. All securities issuances are generally subject to the same federal requirements. This includes (but is not limited to) issuances of bonds, tokenized offerings, financial statements, and other types of investment contracts.

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

How Much Capital Can Companies Raise Through Regulation CF Offerings?

Under the SEC’s 2020 amendments, companies can now rely on Regulation CF’s registration exemption to raise up to $5 million from investors in a 12-month period.

As the SEC explains, “[i]n determining the amount that may be sold in a particular offering, an issuer should count . . . the amount it has already sold (including amounts sold by entities controlled by, or under common control with, the issuer . . . ) in reliance on Regulation Crowdfunding during the 12-month period preceding the expected date of sale, plus . . . the amount the issuer intends to raise in reliance on Regulation Crowdfunding in this offering.” However, funds raised through other exempt offerings (i.e., offerings under Regulation A+ or Regulation D) do not count toward the $5 million limit.

What are the Requirements for Raising Capital with a Regulation CF Offering?

While Regulation CF is intended to facilitate relatively small crowdfunding campaigns, companies’ efforts to raise capital through crowdfunding are still subject to various legal requirements. This is because the SEC’s ultimate focus is on protecting investors. Some of the primary requirements for raising capital with a Regulation CF offering include:

The crowdfunding campaign must be conducted exclusively through a single funding portal, and the platform operator must be registered with both the SEC and the Financial Industry Regulatory Authority (FINRA).
The company must be eligible to conduct an unregistered public offering under Regulation CF. Eligible companies include U.S. companies that are not investment companies, reporting companies, special purpose acquisition companies (SPACs), or companies that are otherwise disqualified from using Regulation CF (including so-called “bad actors”).
Securities issued through the crowdfunding campaign must be subject to transfer restrictions for a minimum of one year, with exceptions for transfers to the issuer, accredited investors, and certain other qualified purchasers.

Again, these are just some of the primary requirements. To ensure compliance with all pertinent requirements, companies seeking to rely on Regulation CF should work closely with an experienced federal securities lawyer throughout the process.

What is a “Bad Actor” Under Regulation CF?

As the SEC explains, “Rule 503 of Regulation Crowdfunding includes ‘bad actor’ disqualification provisions that disqualify offerings if the issuer or other ‘covered persons’ have experienced a disqualifying event.” “Covered persons include owners, officers, directors, predecessors, affiliates, and certain other individuals and entities. Disqualifying events include (but are not limited to):

Certain criminal convictions
Certain SEC cease-and-desist orders
Certain SEC enforcement actions and final orders
Certain actions and final orders from state securities regulators
Suspension or expulsion from a self-regulatory organization (SRO)

Many of these disqualifying events are subject to a limited look-back period, meaning that they are not disqualifying if they occurred long enough ago in the past. As the SEC goes on to explain, “[d]isqualification will not arise as a result of [most] disqualifying events . . . that occurred before May 16, 2016, the effective date of Regulation Crowdfunding,” and, “[w]hether a disqualifying event exists must be analyzed at the time of the filing of the offering statement and each sale pursuant to the offering statement.”

Who Can Invest in a Regulation CF Offering?

Individuals who can invest in a Regulation CF offering broadly fall into two categories: (i) accredited investors; and, (ii) non-accredited investors who meet Regulation CF’s target offering amount. Under the 2020 amendments to Regulation CF, the current investment limits for non-accredited investor are as follows:

Income or Net Worth Less Than $124,000: Investment limit is the greater of: (i) $2,500; or (ii) 5% of the greater of the investor’s annual income or net worth.
Income and Net Worth Greater Than $124,000: Investment limit is 10% of the greater of the investor’s annual income or net worth.

For all non-accredited investors, Regulation CF also imposes a maximum investment amount of $124,000 in any 12-month period, regardless of annual income or net worth.

What Are the Risks of Noncompliance with Regulation CF?

The risks of noncompliance with Regulation CF can be substantial. The SEC takes its duty to protect investors seriously, and companies accused of conducting noncompliant public securities offerings can face a variety of administrative, civil, and even criminal penalties. This means that companies that are preparing to conduct crowdfunding campaigns need to prioritize compliance—and this starts with engaging an attorney experienced with the Securities Exchange Act who can guide them forward.

When is Using Regulation CF Preferable to Using Regulation A+ (and Vice Versa)?

Using Regulation CF may be preferable to using Regulation A+ when a company does not need to raise more than $5 million—as compliance with Regulation CF is generally less onerous than compliance with Regulation A+. Conversely, using Regulation A+ may be preferable (and using Regulation CF won’t be an option) if the company needs to raise in excess of $5 million through an unregistered securities offering.

When is Using Regulation CF Preferable to Using Regulation D (and Vice Versa)?

Similarly, using Regulation CF can be preferable to using Regulation D when Regulation CF’s $5 million investment limit is sufficient. Regulation CF also allows companies to solicit an unlimited number of non-accredited investors through public offerings, while the number of non-accredited investors permitted under Regulation D is severely restricted. If neither Regulation CF’s nor Regulation A+’s investment limit is sufficient, then a private placement under Regulation D may be a viable solution to the company’s capital-raising needs.

How Do You Conduct a Regulation CF Offering?

Due to the complexity of Reg CF compliance (and the risks of noncompliance), working with an experienced federal securities lawyer is essential. A lawyer who has experience guiding companies through Regulation CF offerings will be able to assist with assessing eligibility and managing all aspects of compliance. An experienced lawyer will be able to assist with documenting Regulation CF compliance as well—which can be critical in the event of an SEC inspection or investigation.

Discuss Your Company’s Options with a Regulation CF Offerings Lawyer at Oberheiden P.C.

Do you need to know more about the legal requirements for conducting a crowdfunding campaign in the United States? If so, we encourage you to get in touch for investment advice. To discuss your company’s options with a Regulation CF offerings lawyer at Oberheiden P.C., please call 888-680-1745 or request an appointment online today.