Reg-CF vs Reg-D vs Reg A+ Equity Crowdfunding
May 16, 2022
Launching a new business can be challenging, especially if you need to raise capital just to get started.
Traditionally, entrepreneurs would resort to pitching their ideas to friends and family, securing bank loans, or signing up for credit cards to gain access to instant capital.
Of course, the downside of turning to these sources is that while they may get you the capital they need, they also land you in a pile of debt.
Over the last few years, equity crowdfunding (or ‘community round’ as termed by Wefunder) has become a more solid way of raising capital.
Here’s everything you need to know about raising capital through equity crowdfunding in 2022 and beyond:
What Is Equity Crowdfunding?
In layman's terms, instead of raising debt capital, equity crowdfunding allows founders to raise money from the community in exchange for ‘equity’ in the company.
Equity crowdfunding (also known as crowd-investing or investment crowdfunding) is a method of raising capital used by startups and early-stage companies. Essentially, equity crowdfunding offers the company’s securities to a number of potential investors in exchange for financing. Each investor is entitled to a stake in the company proportional to their investment. Investors may obtain stock ownership in the firm in exchange for cash, or the company may offer other incentives such as convertible notes, dividends, or even debt, in some cases.
So, why is equity crowdfunding considered a better alternative to traditional forms of securing capital?
1. Easier access to capital
Online crowdfunding platforms allow entrepreneurs and companies to showcase their projects to a larger number of potential investors, as compared to conventional forms of capital raising.
2. Less pressure on the management
Unlike the conventional forms of financing, such as venture capital, equity crowdfunding does not result in a dilution of power within a company. Although the number of shares is increased, the involvement of a large number of investors means that power is not concentrated around a particular group of shareholders.
3. Lucrative returns
Although startups are inherently risky ventures, there is still a possibility that a company may become a unicorn and provide very lucrative returns to the investors.
Pros and Cons of Equity Crowdfunding
It’s imperative to weigh your options and make an informed decision before signing up for equity crowdfunding. These are the pros and cons to look through carefully before taking the plunge:
Regulations regarding equity crowdfunding
Equity crowdfunding is still a new phenomenon, only emerging since the turn of the century. Hence, some countries have only recently passed regulations regarding such fundraising methods, while other countries implement only loose, generic regulations. One of the major goals of regulation is the protection of investors, because the fundraising model is potentially prone to fraud.
The biggest leap for equity crowdfunding regulation occurred in the United States with the introduction of the Jumpstart Our Business (JOBS) Act in 2012. Before the JOBS Act legislation went into effect, only accredited investors were able to invest in private companies. This meant that individuals (those who were essentially rich) with a strict income and net worth margin were allowed to fund businesses. This law underwent a major facelift in 2016 when the legislation was tweaked. Now, practically anyone can invest in a private company they’re interested in funding.
Furthermore, back in November 2020, the SEC increased the maximum amount companies can raise through a Regulation Crowdfunding (Reg-CF) offering from $1.07 million to $5 million.
These are the rules of equity crowdfunding that you’ll need to bear in mind:
- Register on an SEC-registered funding portal to initiate investment transactions
- Accept limited funds based on regulatory terms
- Limit the amount of capital you acquire from individuals based on federal limitations over a year
- Publicly disclose information on the amount of funding received, when needed
- Company must be registered in USA if you want to raise the funds in USA
Different rules (read types) of equity crowdfunding
1. Regulation crowdfunding (Reg-CF)
Reg CF allows issuers to raise up to $5 million annually, soliciting investments from any investor age 18+ in the general public. Issuers can raise funds online, but must use an SEC-registered broker-dealer or funding portal, such as Wefunder, Republic, Start Engine and many others.
The regulatory requirements here depend on old your company is and how much you want to raise.
If you are raising more than $1.07 million, you would also need to have an independent CPA audit your financials for the last two fiscal years or since your business’s inception. The rules are much more simpler if you are raising less than $1,07 million.
All due diligence requirements must be met as per the stipulated rules of the equity crowdfunding platform or SEC-registered broker-dealer.
How much can I invest in Reg-CF?
Anyone and everyone can invest up to $2200/year in a regulation crowdfunding round.
If you are an accredited investor, you can invest more than $2200 per year; the maximum amount you can invest is calculated based on the net worth and income declared at the time of application).
If your net worth or income falls below $107k in a year, you can invest a maximum of 5% of either the net worth or income, whichever is higher. Meanwhile, those whose income or net worth is above $107k can invest as much as 10% of the greater value (capped at $107k annually).
2. Regulation A+
Reg A+ allows companies to raise up to $75 million per year from the general public in a more streamlined process than what is required for publicly reporting companies.
You’ll have to hire a securities attorney to file a Form 1-A and submit the same to the SEC for qualification. This can take anywhere between 3 and 5 months to get approved.
A financial audit of the past two fiscal years will also be conducted.
As part of this kind of qualification, two tiers of offerings come into play.
- Tier 1 entails securities offerings of up to $20 million over 12 months.
- Tier 2 involves securities offerings of up to $50 million for 12 months.
A draft of the offering statement needs to be submitted to the SEC if a business hasn’t sold securities under a qualified Regulation A+ offering before. This is confidentially reviewed by the SEC expert. The statement and any amendments made to it must be filed publicly on EDGAR (the SEC’s Electronic Data Gathering, Analysis, and Retrieval system).
Once your company is qualified as per the SEC’s decision, a business is then allowed to sell securities to the general public for capital.
3. Regulation D 506-C
Through this type of regulation, entrepreneurs can raise unlimited funds through accredited investors only.
An offering can be advertised or solicited provided that besides meeting the due diligence conditions, the issuer verifies the status of the accredited investors.
Individuals can raise private funds with securities such as equity shares without having to register actual securities with the SEC or meeting state-regulated filing requirements. However, to proceed with funding under this kind of regulation, entrepreneurs still need to fill certain forms, including a D form, to meet legal pre-requisites.
It’s always a good idea to seek assistance when testing the waters of something as fairly new as equity crowdfunding. Several equity crowdfunding platforms make it easy to get onboarded through their legal guidance, and marketing and financial services.
What you need is a compliance and investor services team to help you with the nitty-gritty of equity crowdfunding and its regulations. Once you know exactly what you’re getting into and how to go about it, getting the capital you need should be easier.
Are you ready to raise capital for your business? Get in touch and let us to help you navigate the legalities and requirements of the regulations you need to successfully kickstart your financial goals.