Regulation CF
Under Regulation CF, companies can raise up to $1,070,000 from both accredited and non-accredited investors. The Regulation CF offering process is relatively simple and inexpensive. A Form C offering statement is filed with the SEC and posted on a funding portal that is a FINRA member and registered with the SEC. The funding portal hosts the company’s offering page containing the Form C information, investment documents, company video, and company summary. The company may advertise and generally solicit investors to drive traffic to its offering page. Investors can make investments by ACH in amounts as little as $100 and acquire equity or debt securities. The entire process can take less than a month to launch and, typically, offerings remain open for about 60 days after launch.
Regulation D
Regulation D, Rule 506(c) offerings are only made to accredited investors, but unlike traditional private placements under Rule 506(b), companies may generally solicit and advertise their offerings. If advertising and general solicitation are used, the company must take steps to verify that each investor is accredited. This includes obtaining a “pro letter,” from the investor’s lawyer, accountant, advisor or broker indicating that the requisite due diligence was performed. Alternatively, a company may perform its own due diligence by obtaining the investor’s W-2, K-1, or tax return to verify income or an investor’s financial statements to verify net worth. No specific type of private placement memorandum is required for a Rule 506(c) offering and no offering circular is required to be filed with the SEC. Issuers can opt to engage a registered broker dealer who may act as placement agent or they may sell securities on their own. Many issuers create offering pages on their own website to facilitate sales of securities under Rule 506(c).
Regulation A
Regulation A (commonly referred to as Reg A+) is the third type of equity crowdfunding. Companies may sell securities to either accredited or non-accredited investors in a Regulation A offering. The company must file an offering statement on Form 1-A with the SEC before selling securities. This offering statement is reviewed by the SEC staff and the company must respond to any comments from the staff. The review process typically takes around 90 days. One benefit of Regulation A over a typical initial public offering is that there is no “quiet period.” Instead, companies may “test-the-waters” under Regulation A. This means that even before a company files its offering statement with the SEC it may let the public know that it plans to undertake a Regulation A offering and obtain non-binding indications of interest from potential investors to determine whether its proposed offering is likely to be a success. Another benefit of Tier 2 Regulation A offerings is that state securities laws are preempt. This means that there is no review at the state level although simple notice filings with state securities law administrators may be required.
Once a company completes a Regulation A offering, the securities are free-trading and the company may choose to have its securities quoted on the over-the-counter markets or, if it meets exchange requirements, on a national securities exchange like NASDAQ or NYSE. Companies that sell securities in a Regulation A offering are subject to ongoing reporting requirements, which is less burdensome than what is required when a company undertakes a traditional IPO.
