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August 13, 2018

Regulation Crowdfunding: The People’s Exemption


By Armando Martinez

In 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) to encourage early stage investment into the nation’s startups. Title III of the JOBS Act, known as Regulation Crowdfunding (Reg CF), created opportunities for “the crowd” to invest in startup companies, an option otherwise unavailable to retail, non-accredited investors prior to the Act. This investor class is now permitted to invest in early-stage companies in exchange for an equity interest under the Reg CF exemption.

Before Title III came into effect, private, early-stage companies could only raise money from accredited investors. Right now, approximately 2% of Americans meet the requirements to be an accredited investor. [1] With the dawn of Reg CF, private early-stage companies seeking capital can solicit investors who traditionally have a lower net worth and income in exchange for equity in their company. Reg CF is a undoubtedly a win-win for start-ups and smaller companies, as it offers a wide net to capture capital for companies and it increases the opportunity for retail investors to become involved in a potential high-growth enterprise.

Companies who are seeking to raise up to $1,070,000 during a 12-month period may wish to rely on Reg CF in their fundraising strategy. By working with an SEC/FINRA-registered intermediary, either a funding portal or broker-dealer, to engage in a fundraising round, the issuer can build relationships with potential investors through the intermediary.  This allows many early-stage startups with enthusiastic, purpose-based missions to generate seed capital through a grassroots method of investing. These investors then become early adopters in the company, who can help the brand flourish by spreading the word to their friends and families.

Why should early-stage companies consider Reg CF to raise capital? First, the cost of conducting a Reg CF capital raise is much lower than conducting a Regulation D (Reg D) or Regulation A+ (Reg A+) offering. Up-front costs are generally limited to legal, accounting and marketing. Secondly, Reg CF offerings are not subject to qualification by the SEC. This means that the time to launch is contingent on how fast the company, its lawyers, and accountants and portals can move the campaign forward, as opposed to the campaign being contingent on the SEC’s review and qualification procedures. Moreover, the Reg CF annual report requirement is far lighter than the requirements under Reg A+. The Form C Annual Report requires only a condensed summary of a traditional annual report to be filed on the company’s website no later than 120 days after the end of the issuer’s fiscal year end.

Reg A+ offerings are more cumbersome to launch. This exemption requires audited financials (Tier II), a longer period of time for SEC review and qualification, and ongoing disclosure requirements. As a result, Reg A+ offerings are more expensive launch, and the ongoing compliance obligations of successful Reg A+ issuers are additional costs to consider. With that said, however, the Reg A+ exemption permits issuers to raise up to $50M from “the crowd” on an annual basis, and the securities sold under Reg A+ are freely tradable at closing. The cost-benefit analysis of Reg A+ must thus be carefully weighed, depending on your business’s positioning, both financially and time-wise, as well as its goals.

Is Reg CF right for my business? Reg CF provides a framework for businesses seeking a cost-effective and time-efficient method to access capital. Like many entrepreneurs, if you are seeking to raise seed capital with low disclosure costs and from a new and diverse retail investor base, you should consider the Reg CF exemption. Remember, Reg CF presents a pathway for your customers  and early-adopters to become owners – potentially resulting in a marketing benefit in addition to the capital infusion that comes from a successful Reg CF campaign.


[1] Andrew Van Dam, The Wall Street Journal, What Percent Are You?, March 2, 2016.

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