Startup Investing with Regulation Crowdfunding (Reg CF)

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Written By Chris Graebe

Regulation crowdfunding is a way for startups and small businesses to raise capital by selling securities (stock in their company) to the general public.

It was created by the Jumpstart Our Business Startups (JOBS) Act, signed into law in 2012, and the SEC issued final rules in 2015 which legalized and provided the framework for regulation.

But how exactly does it work? Let’s get into it.

Origins of Regulation Crowdfunding (Reg CF)

Prior to the JOBS Act, small businesses were limited in how they could raise funds and who they could solicit for investments. Regulation crowdfunding opened up new possibilities by allowing companies to advertise offerings and sell securities to regular, non-accredited investors

This provided startups with a new means of accessing capital from the general public.

The JOBS Act directed the SEC to create rules to regulate and facilitate crowdfunding offerings while also protecting investors. The final SEC rules put guardrails in place, like capping maximum amounts that can be raised and invested.

They also simplified registration and reporting requirements to lower the barriers for businesses to use crowdfunding.

How Regulation Crowdfunding Works

The process for raising funds through regulation crowdfunding involves several key steps:

  1. Register with the SEC – Companies must file a Form C and provide financial statements, a business plan, and other disclosures.
  2. Get a background check – A financial statement audit is required if raising over $535,000.
  3. Pick a licensed crowdfunding platform – Offerings must be made through an SEC-registered intermediary (funding portal).
  4. Promote the offering – Companies can advertise publicly to attract investors now.
  5. Investors purchase securities – Individual investment limits apply based on income and net worth.
  6. Funds are released – Platforms transfer funds if the target amount is met. If not, funds are returned.
  7. File annual reports – Companies must provide updates on the business and its financials.

Key Requirements and Limitations:

  • Startups can raise up to $5 million from regulation crowdfunding offerings in a 12-month period
  • Individual investors are limited in amounts:
    • If income or net worth < $107,000, then limit is greater of $2,200 or 5% of lesser of income or net worth
    • If income and net worth ≥ $107,000, limit is 10% of lesser of income or net worth
  • Transactions must be made through registered funding portals, not directly with companies

Funding Portals vs. Broker-Dealers

Under the SEC rules, regulation crowdfunding offerings must take place online through an SEC-registered intermediary. This can either be a broker-dealer or a funding portal.

Here is an overview of the two types of platforms and key differences:

Funding Portals

  • Created by the JOBS Act specifically for crowdfunding
  • Limited to role of facilitating securities transactions strictly between issuers and investors
  • Cannot provide investment advice or recommendations
  • Not allowed to handle funds or securities involved in transactions
  • More streamlined SEC registration process

Examples of Reg CF funding portals include Wefunder and Republic. You can see a list of all FINRA-regulated portals, here.


  • Traditional financial services firms that are already registered with SEC
  • Allowed to also facilitate private placements under Regulation D
  • Can provide investment advice and recommendations
  • Permitted to handle transmission of funds and securities
  • Subject to higher level of regulation and oversight by SEC and FINRA

Examples of broker-dealers include MicroVentures and CrowdCheck. You can see a list of all FINRA-regulated broker-dealers, here.

Benefits of Regulation Crowdfunding:

  • Easier access to capital – Companies can tap into a wider pool of potential investors from the general public.
  • Lower barriers to entry – The simplified registration process reduces legal and accounting costs.
  • Improved cash flow – Companies can advertise and generate momentum before having to provide securities.
  • More visibility – Marketing to the public helps raise the company’s profile.
  • Alternative to lending – Equity crowdfunding does not create debt like traditional business loans.

Challenges with Regulation Crowdfunding:

  • High failure rate – Many companies pursuing crowdfunding fail to meet their fundraising targets.
  • Ongoing disclosure – Preparing annual reports adds administrative costs for issuers.
  • Risk for investors – Startups have high failure rates, making equity crowdfunding risky.
  • Fraud potential – Lack of transparency into businesses creates opportunity for fraud.
  • Oversight needs – Some believe SEC rules should be adjusted to better protect investors.

The Future of Regulation Crowdfunding:

Since the 2015 rules took effect, hundreds of companies have utilized regulation crowdfunding to raise over $200 million. However, there’s still much more room for growth. 

I believe additional changes to simplify and improve the process could help it gain wider acceptance going forward. 

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