One of the most challenging aspects of capital raising for new entrepreneurs is finding a compromise between the need to quickly access fresh financing and the limits placed by the securities law to protect unsophisticated investors. In this context, the crowdfunding provisions of the JOBS ACT of 2012 (Regulation Crowdfunding “CF”) represent an attractive option in that they allow a company to solicit capital from the general public without restrictions and to welcome a large number of small investors as long as the following requirements are met:
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$5,000,000 cap on the amount that can be raised;
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Individuals with a net worth under $107,000 can invest up to $2,200 or 5% of their annual income or net worth;
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Other individuals are anyway limited to investing no more than 10% of their annual income or net-worth;
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Each investor cannot purchase more than $100,000 worth of securities in any 12- month cycle;
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The company raising capital through CF must file Form C with the Securities and Exchange Commission (SEC) and have ongoing annual filing reporting obligations. However, the information to provide is basic in comparison to other SEC filings for public offerings;
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The financial information disclosure requirements vary depending on the size of the CF offering sought by the company: if less than $250,000, 2 years of Generally Accepted Accounting Principles (GAAP) financial statements will suffice; if more than $250,000, 2 years of GAAP financial statements, together with a review statement of a Certified Public Accountant (CPA); if more than $1.07 million, 2 years of GAAP financial statements, together with an independent audit of a CPA;
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The CF offering must be completed through an authorized intermediary, either a registered broker/dealer or a registered “funding/porta,” in each case regulated and supervised by the Financial Industry Regulatory Authority (FINRA)
While other capital raising tools – such as Rule 506(b) and Rule 506(c) of Regulation D – do not allow or anyhow significantly restrict the opportunity to solicit investments from the general public by permitting the company to accept funding only by accredited investors – individuals with an annual income exceeding $200,000 or a net worth exceeding $1 million – Regulation CF is beneficial for those companies that want to pitch their products or services to small investors outside of their circle.
In light of these features, Regulation CF is a good fit for companies targeting retail customers rather than B2B enterprises, or those early-stage start-ups that might want to use the capital raising process for marketing purposes and create a loyal fanbase of investors/customers.