Simply put, crowdfunding is a method of raising money from a large number of people, often via the Internet. Generally, crowdfunded offerings are placed through online crowdfunding portals. In some cases, including Reg A or Reg D, the issuers can manage the portal. Reg CF are required to be placed and funded through FINRA registered portals for Reg CF.
There are four basic types of crowdfunding:
- Donation-based crowdfunding, where campaigns collect money with no promise of anything in return (i.e. GoFundMe)
- Rewards-based crowdfunding, where the sponsor sets various levels of rewards that correspond with pledge amounts (this is currently the most popular type of crowdfunding—i.e., Kickstarter and Indiegogo)
- Equity crowdfunding, which is the exchange of interests of a private company for capital
- Debt crowdfunding or marketplace lending, which is the raising of capital in the form of a loan, whether for a personal, small business or real estate
Generally, the first two types—donation and rewards-based crowdfunding—do not fall under securities law and are regulated by the Federal Trade Commission. The latter two types—equity and debt crowdfunding—do fall under securities laws and are regulated by the Securities and Exchange Commission and state-level regulators.
Crowdfunding Lawyers represents all federally regulated securities transactions, including equity and debt crowdfunding and other exempt and registered offering.
Investors can invest a limited amount (unless accredited without limits) to seek a return on investment. It serves as a way for businesses and companies to raise capital outside the standard bank loan or self-funding options. Equity crowdfunding (also called “investment” crowdfunding) often refers to Reg CF crowdfunding. It’s a bit of a misnomer since companies can raise equity OR debt.
Regulation A has been around for years but was never widely used because of its high qualification burden and costs relative to the low amount that may be raised (the max offering amount is currently capped at $5 million per year). However, with the passage of the JOBS Act in 2012, the SEC implemented changes to Regulation A, most notably an increase in the maximum dollar amount that may be offered by the issuer. Under Tier 1, companies can raise up to $20 million per year from accredited and non-accredited investors. Under Tier 2, companies can raise up to $75 million per year from accredited and non-accredited investors, but there are certain limits on the individual’s investment. Since a Regulation A+ offering is like a mini-IPO, issuers must have their offering documents and disclosures qualified with the SEC. A Regulation A+ offering is unique because it allows companies to advertise their offering while accepting funds from non-accredited investors publicly. See the Crowdfunding Cheat Sheet for more details.
Regulation D has been around since 1933 and is the most utilized investment registration exemption in the market. For example, Reg A offerings raised approximately $1billion, and Reg D offerings raised approximately $1.5trillion in 2019. Reg D is comprised of 3 separate offering exemptions.
Rule 504 is for offerings of up to $10mil within 12 months. While this is an exemption under the federal securities laws, the issuer must still meet all state securities laws or exemptions appropriate to where the investors are located.
Rule 506 (b) allows issuers to sell an unlimited amount of securities to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors within any 90 day period. Reg D Rule 506(b) restricts general solicitations, meaning advertising or seminars, except “demo days,” are not permitted.
Rule 506 (c) allows issuers to sell an unlimited amount of securities through general solicitation and advertising. Investors are required to be verified as accredited by select categories of third parties or by the issuer.
An individual is categorized as an accredited investor if the person has an income over $200,000 in annual income for the last two calendar years (or $300,000 when combined with their spouse or spousal equivalent) or a person with a net worth over $1 million, excluding their primary residence.
Entities may also be accredited investors, though various definitions apply depending on the type of entity. The most common are entities where 100% of the owners are accredited investors or entities with more than $5million in assets.
At the highest level, many describe crowdfunding as simply online syndication. If you want to dig into semantics, syndication is the structuring of a deal, whereas crowdfunding is a method of raising capital. Please read this article for more detail.
Title III of the JOBS Act allowed the SEC to create equity crowdfunding options to enable companies to raise money online from anyone–not just accredited investors. Under Regulation Crowdfunding (aka Regulation CF or Reg CF), small companies and start-ups can raise up to $5 million under Reg CF from both accredited and non-accredited investors. Still, they must do so through a registered broker or portal. There are also limits on the individual investment amounts for non-accredited investors. There isn’t a limit on investment amounts for accredited investors. See the Crowdfunding Cheat Sheet for more details.
It depends on many different factors, including the type of business you run, how much money you wish to raise, your financials, the types of investors you want to solicit, etc.
If you choose to work with Crowdfunding Lawyers, we will coach you on your options with the goal of maximizing your ability to meet your goals based on your business plan.
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