Per the new Rule 241, issuers may now use generic solicitation of interest materials for an offer of securities prior to determining whether to utilize Regulation Crowdfunding, or another securities exemption, in its capital raising activity. The generic testing-the-waters (TTW) materials would have to contain certain legends for investor protection.
Once you decide to utilize Reg CF for your company’s crowdfunding raise, you will need to file a compliant Form C with the SEC. A compliant Form C will contain a significant amount of information about your business, financials, directors and officers, capitalization, prior offerings, use of proceeds and the terms of the Reg CF offering, among other specified disclosures. Any TTW materials utilized within 30 days of the filing of the issuer’s Form C with the SEC would need to be exhibited to the offering materials filed with the Commission.
An issuer is required to disclose all material documentation and information relating to:
Financial statements of the company:
Costs vary depending on which funding portal you are working with and the professional service providers you choose to work with.
Still, a capital raise under Reg CF can be far less expensive than a traditional round where more robust offering documents, audited financials and investor negotiations come into play.
The minimum campaign period is 21 days.
This is because of the requirement that disclosure be made publicly available on the intermediary’s platform for this period of time before any securities are sold in an offering. Typically, the campaign period is 30-90 days. Issuers have discretion to extend the deadline, if necessary.
In the event an issuer does not meet the minimum target campaign goal before the offering deadline, the investment commitments will be canceled and returned to investors.
An issuer will determine in advance of the offering whether they will accept investments in excess of the target offering amount. Specifically, an issuer will have to decide how over-subscriptions will be allocated (e.g., pro-rata basis, first-come, first served basis, or at the company’s discretion).
This decision will be disclosed in the Form C.
An issuer may conduct side-by-side offerings under Reg CF and Regulation D, Rule 506(c) as long as both offerings are compliant. This would permit an issuer to raise up to $5,000,000 from the crowd under Reg CF while raising additional capital from accredited investors under Reg D, Rule 506(c). A company offering a side-by-side round would need to disclose the fact that it was conducting the side-by-side offerings to all investors.
Pro-tip: The new 17 CFR 227.204(d) specifies that an issuer may provide information about the terms of an offering under Regulation Crowdfunding in the offering materials for a concurrent offering (ex. in the Offering Circular on Form 1-A; or in a registration statement field with the SEC), without violating Rule 204. To do so, the information provided about the Regulation CF offering must be in compliance with Rule 204, including the requirement to include a link directing the potential investor to the issuer’s offering page on the funding portal’s wegsite as required by Rule 204(b)(1). If the offering statement is being filed with the SEC, the link need to be a live hyperlink.
Further, these companies must give investor disclosure documents that are generally the same as those in Regulation Crowdfunding to the Reg D investors. In addition to filling a Form D with the SEC, Reg D issuers must comply with state blue sky notice requirements.
Although securities sold under the Rule 506 safe harbor are exempt from state level registration, most states’ securities laws require the issuer to file a notice filling and pay related filling fees in the states where investors reside.
A valuation may not be necessary to conduct a Regulation Crowdfunding campaign. Fundraising through convertible debt or debt instruments will allow an issuer to value the company in a later round of financing.
After selecting a funding portal, many companies rely on the portal to market the campaign to potential investors. On the funding portal’s site, issuers create a campaign page that often have a 2-3 minute video advertisement. Some companies also choose to incentive participation with non-monetary perks.
After filling the Form C, companies are limited to communicating orally or publicizing the offering via a “tombstone” advertisement. This includes a very limited set of facts including:
Yes. Source: SEC C&DI.
No. The limitation on advertisement applies only when the advertisement includes any of the “terms of the offering.”
Source: SEC C&DI.
Yes. If the media article advertises the terms of the offering and the issuer has been directly or indirectly involved in the preparation of the publication, the article would be a notice subject to Rule 204. Because Rule 204 limits the information that may be in such a notice, it would likely be difficult for the issuer to comply with the rule’s requirements.
If the media article did not advertise the terms of the offering, it would not be a notice subject to Rule 204, although it could still constitute an “offer” under the securities laws.
Source: SEC C&DI.
A company must provide an update on its progress toward meeting the target offering amount within 5 business days after reaching 50% and then 100% of its target offering amount. These updates are filed on a Form C-U.
If the intermediary provides frequent updates on its platform regarding the progress of the issuer meeting its target offering amount, the issuer will need only to file a final Form C-U at the conclusion of the offering to disclose the total amount of securities sold.
Additionally, after completing the crowdfunding campaign, an issuer is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year. The report must be filed on EDGAR and posted on the issuer’s website.
Issuers must comply with the annual reporting requirement until one of the following occurs:
Any issuer terminating its annual reporting obligations is required to file notice on Form C-TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.
The issuer would count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering.
Source: SEC C&DI.
Yes, almost anyone in the U.S. can invest in an equity crowdfunding offering. Given the inherit risks of investing, the SEC limits how much you can invest during any 12-month period. The limitation on how much you can invest depends on your net worth and annual income. Pro tip: Check in advance with the funding portal to see if non-U.S. persons can invest. Not all portals permit offshore investments!
An investor can only invest in a crowdfunding offering through the online platform of a broker-dealer or funding portal.
Simple Agreement for Future Equity (SAFE) is a convertible security similar to an option or warrant that permits an investor to be issued capital stock of the company upon the occurrence of a future event. Distinguishable from a debt instrument, there is neither a maturity date nor interest rate. A SAFE may convert into equity during a future priced round of financing or upon a liquidity event. Crowd SAFEs do not typically extend voting, information, or inspection rights to investors.
Crowd Notes, unlike traditional convertible notes, do not automatically convert to equity ownership. Crowd Notes do not typically extend voting, information, or inspection rights to investors. However, investors often receive at least a 2x corporate transaction payment if an acquisition occurs prior to the Note’s conversion.
Generally, securities purchased in a Reg CF offering cannot be resold for a period of one year (similar to Rule 144). There may be additional transferability restrictions imposed by the company thereafter.
If the sum of the investment commitments does not equal or exceed the target offering amount by the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled and committed funds will be returned.
What are some of the risks to consider before making a crowdfunding investment? Before investing, investors should be aware that early-stage investments involve a high degree of risk and thorough research is recommended before making an investment decision. Specifically, crowdfunding investments are highly speculative, may have limitations to one’s ability to resell the investment for the first year and cancellation restrictions. Further, there may be limited disclosures, a possibility of fraud, and lack of professional guidance.
In the context of Reg CF, a repurchase right may mean the company’s option to buy back (i.e. repurchase) securities from purchasers.
Investors in a Reg CF offering may be classified as “Major Investor” if their investment amount hits a certain threshold, such as $25,000. Often times, this designation provides investors with several rights that the other purchasers in the offering are not entitled to, including:
“Funding Portals”, also known as “Registered Intermediaries”, are SEC-registered, FINRA members that facilitate the transactions and market the issuer’s campaign to interested investors.
Typically, the issuer pays the intermediary at the conclusion of the offering a fee consisting of a cash commission based on the amount of funds raised in the offering and a commission in the form of securities.
Some funding portals have additional on-boarding fees, including escrow set-up fees and fees related to transfer agent services.
Cost may vary depending on which portal the issuer selects. Please confirm the below estimates with the funding portal directly.