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Bevilacqua PLLC Capital Markets Attorney Patrick Costello recently authored a white paper on securities offerings under Regulation Crowdfunding. Here’s a broad summary of the white paper’s contents, focusing on the essentials of what you need to know about Regulation Crowdfunding.

1. Intro and Background

The Securities Act of 1933 (the Securities Act) sets forth the rules and regulations for selling equity securities in the United States. The most well-known example is the Initial Public Offering (IPO) which is registered with the SEC pursuant to section 5 of the Securities Act and Regulation S-K thereunder. However, IPOs are expensive and time-consuming and subject companies to significant regulatory scrutiny.

To avoid the intensive requirements of registered offerings, companies may opt for exempt offerings, which are less regulated and have varying disclosure requirements depending on the exemption in question. Regulation Crowdfunding is one type of exempt offering that has emerged as a popular method of raising capital after its introduction in the JOBS Act of 2012.

Regulation Crowdfunding offers startups a more cost-effective and expedient alternative to traditional offerings. Additionally, the global crowdfunding market, valued at $1.25 billion in 2022, is projected to see significant growth by 2030. This method’s rising popularity is due to its ease of access and lower compliance costs, making it an attractive option for startups looking to raise capital.

2. Key Aspects of Regulation Crowdfunding

Regulation Crowdfunding plays a crucial role in democratizing equity financing, allowing startups and small businesses to access capital through public participation, a space previously dominated by accredited investors. The regulation sets a $5 million cap on raises within a 12-month period, outlines detailed eligibility requirements for issuers, and imposes strict investor purchasing limitations that vary based on the investor’s financial status and net worth.

Moreover, stringent disclosure through an Offering Statement on Form C and rigorous ongoing reporting obligations are critical for maintaining transparency and fostering an informed investment environment. This framework’s success hinges on its ability to balance capital access with robust safeguards, shaping a sustainable future for crowd-sourced funding.

3. Timeline for Launching a Crowdfunding Offering

Launching a crowdfunding campaign generally takes about six weeks, from the initial planning stages to the filing with the SEC, assuming the company’s financials are in order and the necessary audits or reviews are promptly completed.

This timeframe can extend depending on various factors, such as the complexity of the business, the efficiency of the chosen intermediary-crowdfunding platform hosting the offering, and the depth of the marketing and preparation efforts. More intricate business models or financial structures may require additional time to address all regulatory and disclosure needs thoroughly.

4. How Much is a Crowdfunding Offering?

The costs associated with a crowdfunding campaign are influenced by several factors, including:

Accounting and Legal Costs: Accounting costs for reviewing financial statements range from $2,500 to $10,000, while audits, if necessary, can cost between $10,000 and $30,000. Legal expenses for preparing Form C and other related documents typically run from $5,000 to $35,000, depending on the offering’s complexity.

Intermediary Commissions and Marketing Fees: Intermediaries usually take a commission of 5-7% of the total amount raised, and some may also require an equity fee based on the type and quantity of securities sold. Marketing costs for video production, social media, and public relations efforts are highly variable.

Additional Fees and Costs: State securities law filing fees are generally minor. Ongoing reporting, including annual reports and amendments to offering statements, typically costs between $3,000 and $10,000 annually, depending on business complexity. Insurance, technology or platform fees, and other miscellaneous expenses can vary widely.

5. Who is Eligible to use Crowdfunding Exemption?

There are four factors that must be satisfied in order for a securities offering to qualify for the Crowdfunding exemption from the Securities Act’s registration requirements:

Maximum Offering Amount: Issuers can raise up to $5 million on a rolling 12-month basis.

Investor Purchasing Limitation:

Accredited Investors: No investment limits.

Non-Accredited Investors: Investment limits based on annual income or net worth. Those with less than $124,000 can invest the greater of $2,500 or 5% of their income or net worth, while those above this threshold can invest up to 10%, capped at $124,000 annually.

Intermediary Involvement: All offerings must be conducted through a single, registered intermediary (either a broker-dealer or a funding portal) that complies with SEC and FINRA regulations.

Issuer Eligibility: Excludes non-U.S. companies, companies already reporting under the Exchange Act, certain investment companies, bad actors, companies delinquent in their ongoing reporting, and blank check or special acquisition companies without a specific business plan or target.

6. Successfully Completing and Filing Form C

Form C is essential for launching a Crowdfunding Offering, serving as both a compliance document and a disclosure medium for potential investors. It consists of two main parts: the Form C, which collects basic information about the issuer, and the Offering Statement, which provides detailed disclosures as mandated by Regulation Crowdfunding. Specific disclosures on Form C include:

Issuer and Intermediary Details: Basic data such as names, addresses, organizational forms, and the compensation details of the intermediary.

Offering Details: Types of securities offered, pricing, target offering amount, and jurisdictions of the sale.

Financial Information: Key financial data and statements to give investors insight into the issuer’s financial health.

7. Key Aspects of the Offering Statement

The Offering Statement on Form C for Regulation Crowdfunding includes comprehensive details about the issuer, such as:

      Basic organizational information

      Statements of the risks associated with the business

      Detailed biographies of directors and officers, principal security holders

      Extensive disclosures about the business’s nature, market, and operational strategies

      Description of how the offering proceeds will be used

Additionally, financial compliance is ensured through required historical financial statements that vary in detail based on the offering size, from simple certifications for smaller amounts to full audits for larger sums. The offering statement is vital in maintaining transparency and providing investors with critical information needed for informed decision-making in crowdfunding ventures.

8. Ongoing Reporting Requirements

Regulation Crowdfunding requires issuers to maintain minimal yet essential ongoing reporting to keep investors updated. Issuers must file annual reports within 120 days of the fiscal year-end via Form C-AR, which revises and updates the initial offering statement, including financials and operational details. Subject to certain exceptions, progress updates are necessary when half and all of the target offering amounts are reached, documented through Form C-U.

Additionally, issuers must file amendments to reflect any material changes using Form C-AR/A or C/A, and a termination report via Form C-TR when ceasing ongoing reporting obligations under specified conditions, such as becoming a reporting company under the Exchange Act of 1934 or dissolving the business.

9. Advertisements and Pre-Filing Communications

Direct advertising of offering terms in Regulation Crowdfunding is largely restricted, except for tombstone notices that can include basic details about the offering and direct interested parties to the intermediary’s platform. Prior to filing an offering statement, issuers can engage in pre-filing communications to gauge investor interest without requesting funds. These communications must clarify that no commitments can be made until the offering is officially opened through the intermediary.

Communications through intermediary-provided channels are allowed if they properly identify the issuer, and promoters can be used provided their compensation is clearly disclosed. These rules ensure that all promotional activities are transparent and do not mislead potential investors.

10. Resale Restrictions

Securities acquired through Regulation Crowdfunding are considered restricted and come with a 12-month “lock-up” period post-closing, during which they cannot be freely sold or transferred. The exceptions to this restriction allow sales back to the issuer, to accredited investors, as part of a registered offering, or to family members under specific circumstances such as death or divorce.

Beyond this initial period, any resale of these securities still requires an exemption from the Securities Act’s registration requirements unless the issuer has registered the securities class. This framework ensures controlled trading environments while still providing avenues for liquidity under certain conditions.

11. Co-Issuer Offerings

Introduced in 2020, Rule 3a-9 under the Investment Company Act of 1940 enables co-issuer offerings under Regulation Crowdfunding involving two entities: an Operating Company and a Crowdfunding Vehicle. The Crowdfunding Vehicle holds and disposes of securities from the Operating Company, facilitating capital raising while ensuring compliance. This structure bypasses typical investment company registration requirements by maintaining a strict operational focus.

In a co-issuer arrangement, the process concludes in two phases: the Crowdfunding Vehicle first issues its securities to raise funds, then acquires an equivalent amount of securities from the Operating Company. This setup ensures that each security held by an investor in the Crowdfunding Vehicle corresponds directly to a security in the Operating Company, providing a streamlined and transparent investment experience. Both entities must fully disclose their operations, securities details, and financial conditions in the Offering Statement to maintain transparency and compliance.

12. Why Exchange Act Section 12(g) Matters for Crowdfunding Issuers

Section 12(g) of the Exchange Act mandates that issuers register a class of securities with the SEC when their assets exceed $10 million and such class of securities is held by either more than 2,000 persons or 500 non-accredited investors. This registration triggers the necessity for continuous reporting under Sections 15(d) and 16 of the Exchange Act, involving detailed annual, quarterly, and periodic reports, as well as disclosures related to insider transactions.

For crowdfunding issuers, managing the “Held of Record” count is critical to avoid inadvertently crossing these thresholds, especially given the costs and compliance requirements involved. Special rules apply to the count, treating securities owned by entities as held by a single person and excluding those obtained through employee compensation plans under specific conditions.

Securities issued under Regulation Crowdfunding are exempt from the count if the issuer remains current with annual reports, has assets under $25 million, and employs a transfer agent. If these conditions are met, are allowed time to adjust before needing to register under Section 12(g) if they exceed the asset threshold.

Download the White Paper for a Deep Dive on Regulation Crowdfunding

Regulation Crowdfunding makes it easier for startups and small businesses to raise money from a wider range of persons, not just wealthy accredited investors. Overall, the future of this type of fundraising depends on parties working together to create a system that fosters innovation and growth while offering accessible investment opportunities.

For a full in-depth look at everything you should know about Regulation Crowdfunding, download the full white paper or contact Bevilacqua PLLC today.


This post contains general information. This post is not intended: (a) to convey or constitute legal advice on any subject matter; (b) to establish an attorney-client relationship; or (c) to be a solicitation. Also keep in mind that prior results in a legal matter do not guarantee a similar outcome in another legal matter.

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