Regulation CF: Investment Crowdfunding for Small Businesses

Regulation Crowdfunding — commonly called Reg CF — is an SEC exemption that allows companies to raise capital from the general public through online crowdfunding platforms without registering the offering as a public securities offering. Enacted under the JOBS Act of 2012 and effective since 2016, Reg CF has evolved through subsequent SEC rulemaking and now permits companies to raise up to $5 million in a 12-month period from a broad pool of investors, including non-accredited investors. For small businesses and startups that want to raise community capital or engage their customer base as investors, Reg CF offers a regulated path.

What Regulation CF Allows

Reg CF allows eligible companies to sell securities — equity, debt, revenue-sharing arrangements, and other instruments — to investors through an SEC-registered intermediary: either a registered broker-dealer or a funding portal registered with both the SEC and FINRA. The maximum amount that can be raised in a 12-month period under Reg CF is $5 million. All transactions must be conducted through a single intermediary platform, and issuers cannot use multiple platforms for the same offering.

Who Can Use Reg CF

Most US-organized businesses can use Reg CF, with significant exceptions. Companies that are already SEC reporting companies (publicly traded), foreign private issuers, investment companies (including certain shell companies), and companies that have had their Reg CF exemption revoked are ineligible. Blank check companies — companies with no specific business plan whose principal business is to identify and acquire other businesses — are also ineligible. The company must have a defined business or business plan, must be incorporated or organized in the United States, and must file required disclosures with the SEC.

Investor Investment Limits

One of the distinguishing features of Reg CF is that it allows investment by non-accredited investors — ordinary individuals who do not meet the wealth or income thresholds of the accredited investor definition. To protect less sophisticated investors, Reg CF imposes investment limits based on the investor’s income and net worth. If either the investor’s annual income or net worth is less than $124,000, the investor can invest the greater of $2,500 or 5% of the lesser of their annual income or net worth. If both are $124,000 or more, the investor can invest up to 10% of the lesser of their annual income or net worth, up to a maximum of $124,000 across all Reg CF investments in a 12-month period. Accredited investors have no investment limit under Reg CF.

Disclosure Requirements

Companies offering securities under Reg CF must file a Form C with the SEC, which must include: a description of the business and its intended use of the proceeds, the terms of the offering (type of security, target offering amount, deadline, and price), information about the company’s officers, directors, and significant owners, the company’s financial condition, and a discussion of risk factors.

Financial statement requirements depend on the amount being raised. For offerings up to $124,000, the company’s most recent tax returns and financial statements certified by the principal executive officer as accurate and complete are sufficient. For offerings between $124,000 and $618,000, financial statements reviewed by an independent CPA are required. For offerings between $618,000 and $5 million, financial statements audited by an independent CPA are required — unless the company is conducting its first Reg CF offering, in which case reviewed statements are sufficient.

Ongoing Reporting Obligations

Companies that complete a Reg CF offering incur ongoing reporting obligations that often surprise issuers. An annual report on Form C-AR must be filed with the SEC within 120 days after the end of each fiscal year, covering similar information to the Form C offering disclosure. These obligations continue until the company has fewer than 300 holders of record, has had its securities repurchased, or has registered a class of securities under the Exchange Act. The reporting burden is a meaningful consideration for businesses contemplating Reg CF offerings.

The Transfer Restriction Period

Securities issued in a Reg CF offering cannot be resold for one year from the date of purchase, with limited exceptions (transfers to the issuer, to accredited investors, to family members in connection with death or divorce, or pursuant to an SEC-registered offering). This restriction creates a significant illiquidity concern for investors and affects the economics of Reg CF investments. Investors must be fully informed of this restriction before investing.

Practical Considerations for Businesses

Reg CF is most appropriate for companies that have an engaged customer or community base that would be interested in investing, companies raising between $500,000 and $5 million, and companies that are prepared for the disclosure and ongoing reporting obligations. The compliance costs of a Reg CF offering — legal fees for Form C preparation, accounting fees for reviewed or audited financial statements, and platform fees (typically 5 to 8 percent of the amount raised) — mean that Reg CF is generally not cost-effective for raising less than $250,000 to $300,000.

Managing a large number of small investors creates governance complexity that companies should think through before launching a campaign. Hundreds of small investors holding non-voting instruments are generally manageable, but companies need clear provisions in their operating agreements or charter documents addressing how Reg CF investors’ interests are held and governed.

The Bottom Line

Regulation Crowdfunding is a legitimate and accessible capital-raising tool for small businesses with an engaged community or customer base. But it is not simple, and it is not free of regulatory obligations. Companies contemplating Reg CF should work with securities counsel and accountants experienced in the exemption from the earliest planning stage, understand the post-offering reporting obligations they are accepting, and carefully evaluate whether the amount they can raise justifies the compliance costs and the governance complexity of having a large number of small investors.