Reg CF or Regulation Crowdfunding is a method for early-stage private companies to raise capital from the general public, by publicly advertising their offerings on the internet.
Through Reg CF, the investors get securities (generally equity) in the company they are investing in, as an exchange for their investment. The amount of money that can be raised through Regulation CF is $1,070,000 in a 12-month period.
Before the signing of the JOBS Act (Jumpstart Our Business Startups) on April 5, 2012, entrepreneurs could only raise capital through accredited investors, which amounted to the wealthiest top 2% of all Americans.
Four years after the signing of the JOBS Act, Title III (aka Regulation CF) came into effect. It allowed entrepreneurs to turn their customers into their investors.
There are certain companies that cannot use Regulation CF including:
a) Non-U.S. companies
b) Companies that are Exchange Act reporting companies
c) Companies which are disqualified companies based on Reg CF rules
d) Some investment companies
e) Companies with no specific business plan
f) Companies that did not comply with the filing of annual reports during the first two years after filing and launching the offering
How Regulation Reg CF Actually Works
To raise funds through Reg CF, it is necessary to follow the steps that are discussed below:
1) Preparation of the Offering and Selection of an Intermediary
Every issuing company needs to file Form C through the Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Each Reg CF can be conducted exclusively through only one broker-dealer or funding-portal, which must be registered with the Securities and Exchange Commission and FINRA.
There are certain restrictions in the advertising process for the offering. Issuing companies can advertise their offerings through a notice that directs investors to the intermediary’s platform.
Disclosure of Certain Information in the Offering Statement
The offering statement must disclose the following information including: directors, officers and shareholders owning a 20% or greater stake in the company, a business description of the company, financial health and financial statements of the company, the target amount of the offering and the use of the offering proceeds, related party transactions, the price determination method of the securities being offered in the offering, etc. The offering statement should also disclose if the issuing company will accept investments for more than the target offering amount.
2) The Process of Launching the Offering
After the necessary filing of Form C, the company can launch the offering of its sec urities through the selected intermediary. The intermediary is responsible for accepting the investments online, after making the necessary checks (such as verification of investor identities, money laundering checks on the investments, etc.)
In order to allow sufficient time for investors to decide about their investment, companies are not allowed to close the round of offering for 21 days after the listing of the offering with the intermediary. The funds collected from investors are kept in escrow, until the closing of the round of offering.
3) In Case of Offering Amendments
If there are any amendments/material changes that need to be made to the offering, the issuing company must file a Form C/A to inform about the changes, additions or updates to the original offering statement.
Once investors are informed, a reconfirmation needs to be obtained from them within 5 days of the notification about the changes. Any failure in obtaining re – confirmation, leads to the cancellation of the investment.
4) Updates Provided About the Progress of the Offering
Updates about receiving 50% and 100% of the target amount need to be filed on Form C-U, within 5 days of achieving the targets. If the issuing company accepts funds exceeding the target offering amount, this also needs to be filed on the final Form C-U.
5) The closing of the Round of Offering of Securities
The final step involves the closing of the process of acceptance of investments and the intermediary certifies compliance with the legal and regulatory obligations. After these steps have been completed, the funds (which were initially kept in escrow) are finally transferred to the company’s account.
Other Regulatory Requirements of Regulation CF
1) The issuing company generally needs to provide an annual report of the company on Form C-AR, within 120 days of the end of the fiscal year. The annual report can be obtained from EDGAR or the company’s website. There are some pre-decided circumstances, when an issuing company does not need to issue its annual report. If a company is going to terminate its obligations of filing the annual report, it needs to file Form C-TR informing the investors about the change.
2) The review or audit of financial statements is not required for issuing companies that are offering $107,000 or less. The requirements related to financial statements depend on the amount specified in the offerings.
3) If the issuing company or “covered persons” experience a disqualifying event, such as being subjected to litigation for securities fraud, etc., the offering becomes disqualified under the “Bad Actor Disqualification” provisions of Rule 503.
Regulation CF Portals
As of May 31, 2018, there are 41 Reg CF portals that are registered with FINRA and SEC. The total amount raised through these portals is more than $100 million. There has also been no fraud for issuing companies using the Reg CF exemption.
The Bottom Line
Regulation Crowdfunding is a promising new opportunity for early-stage startups to raise funds using the internet through non-accredited and accredited investors in the United States. It is a win-win situation for all entrepreneurs, as well as investors who want to invest their funds in promising companies in order to earn a good return on their investment.
About: Chris Lustrino
A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.