Opportunities Provided under Regulation CF
Every offering of equity in the U.S., including both traditional securities and digital assets, must be registered in the SEC, unless it utilizes one or several regulatory exemptions. Registration with the SEC is a long, costly, and complicated procedure, which is out of reach for the majority of those wishing to raise funds from U.S. investors.
Before the adoption of the Jumpstart Our Business Startups Act (also known as JOBS Act), all the existing exemptions from registration requirements allowed venture capitalists approaching only accredited U.S. investors when making an offering without registration with the SEC. As an accredited U.S. investor must either earn annual income exceeding $200,000 ($300,000 with the spouse) or have a net worth exceeding $1 million (excluding primary residence), such limitation excludes a significant number of other potential investors.
Regulation CF, adopted by the SEC in 2015 to implement Title III of the JOBS Act, enabled startups and established companies to attract funds from all U.S. investors, irrespectively whether they are accredited or not, without registering the offering with SEC.
Regulation CF Limitations
While Regulation CF expands the options for raising funds from the American investors, it also contains certain limitations, which must be complied with to be exempt from the registration requirements, including:
- The issuer of securities under Regulation CF must be a U.S. entity;
- The maximum amount of investments, which can be raised under Reg. CF cannot exceed $1,070,000 in a 12-month period;
- Investors are limited in the amount they are allowed to invest in proportion to their income;
- The offering must be made only through a broker-dealer registered with SEC or a funding portal accredited with the Financial Industry Regulatory Authority (FINRA);
- Securities purchased under Regulation CF cannot be traded on the secondary market within a year of ownership, except to family members or accredited investors.
Guiding Clients Through Every Stage of Equity Crowdfunding Under Regulation CF
Our attorneys provide a comprehensive legal services package, including legal support on every stage of the crowdfunding process under Reg CF in the U.S., including:
- Corporate structuring for domestic and foreign issuers — incorporating a legal entity in the U.S. or creating a U.S. holding for a foreign company;
- Structuring the offering and equity terms;
- Advising on operational questions, including the work with broker-dealers, funding portals and other crowdfunding intermediaries or service providers;
- Due diligence of advertising materials and other documents published on the funding portals and the limited information that can be provided to investors outside of the funding portal;
- Advising on opportunities for combined offering to accredited investors under Reg D and non-accredited investors under Reg CF;
- Drafting and filing the Form C offering statement with the SEC that will include, among other things, (i) information about the company owners, directors, and officers; (ii) description of the issuer’s business; and (iii) an overview of the issuer’s financial situation and other required information.
Transactions Conducted Through an Intermediary
Each Regulation Crowdfunding offering must be exclusively conducted through one online platform. The intermediary operating the platform must be a broker-dealer or a funding portal that is registered with the SEC and FINRA.
Issuers may rely on the efforts of the intermediary to determine that the aggregate amount of securities purchased by an investor does not cause the investor to exceed the investment limits, so long as the issuer does not have knowledge that the investor would exceed the investment limits as a result of purchasing securities in the issuer’s offering.
Certain companies are not eligible to use the Regulation Crowdfunding exemption. These include:
- non-U.S. companies;
- companies that already are Exchange Act reporting companies;
- certain investment companies;
- companies that are disqualified under Regulation Crowdfunding’s disqualification rules;
- companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement; and
- companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Regulation CF Related Resources:
Regulation CF Service
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Dilendorf Law Firm provides counseling to U.S. and international clients who are seeking to attract funds from the U.S. non-accredited investors utilizing opportunities provided by the Regulation Crowdfunding (also known as the Regulation CF).